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Pump price concerns found as watchdog launches investigation

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Written by:
08/07/2022
Drivers have seen pump prices rise by over 60p in the last year and following the competition watchdog’s urgent review of the fuel market, it has now launched a formal investigation.

Households now pay an average of £500 a year extra to fill up their cars following the petrol and diesel price hikes.

The Russian invasion of Ukraine intensified the price hikes and in March, the government announced it would cut fuel duty by 5p a litre.

However, concerns were raised that the fuel duty cut was not passed on to drivers, and that any falls in wholesale prices were not passed on as quickly as when prices rise.

As such, the Competition and Markets Authority was asked to carry out an urgent review of the fuel market. It has today published its initial findings and has confirmed it is launching a formal investigation after its review found “cause for concern in some parts of the road fuel market”.

What did the fuel market review find?

While the CMA said there were concerns about fuel retailers profiting from the current situation, its review found the gap between wholesale prices and retail prices – the retailer spread – has not been a significant contributor to the overall rise in pump prices.

It noted that while the retailer spread had been volatile and that pump prices rose while wholesale prices have fallen, it remained around 10p per litre on average.

The report stated: “In interpreting these changes, it is important to keep in mind that changes to wholesale prices are generally only reflected in retail prices after a number of weeks. This is because the fuel held by retailers at any moment will have been paid for at a different (earlier) wholesale price.

“During periods of falling wholesale prices, retailer spreads can therefore remain higher than average; but this does not necessarily indicate that retailers are earning higher profits, because many retailers will have paid for wholesale fuel at an earlier, higher price.”

Turning to the 5p fuel duty cut, the CMA explained that it is charged at the point at which fuel leaves refineries or coastal terminals so it is principally paid by oil companies and importing traders.

“At the point that the duty cut took effect, fuel retailers will have had in the tanks underneath their forecourts a quantity of fuel paid for at the higher duty rate. Reflecting the duty cut in retail prices immediately after the announcement would have meant them incurring a cost on the sale of that remaining fuel,” it noted.

The CMA found that supermarkets, which account for 44% of all fuel sales, cut prices by just over 5p per litre immediately following the duty cut. As such, they likely incurred a cost. Prices charged by other types of retailer also fell in the days following the duty cut. These reductions were less than 5p: around 3.5p in the case of oil company-operated sites, and 2.1p in the case of independently operated sites.

However, the CMA noted: “These price reductions occurred in a period where – absent the duty cut – retail prices might otherwise have been expected to rise.”

It found that in the weeks following the duty cut, retail prices “remained below levels observed on 23 March” – the day of the fuel duty cut announcement.

By 7 April, they remained 3-5p per litre lower for petrol and 2-4p lower for diesel. However, the CMA noted that the price reduction that followed the duty cut was temporary, and prices resumed an upward trend from around May 2022.

It said these price rises were driven principally by rising crude oil prices and refining spreads (gap between the price of crude oil entering refineries and the wholesale price of petrol and diesel leaving them), as opposed to a growing gap between wholesale and retail prices. The refining spread had tripled in the last year, growing from 10p to nearly 35p per litre.

Is competition working in the fuel market?

Whether competition is working well in the fuel market, the CMA said in places with a range of nearby retailers, competition is likely to be strong, and work to the benefit of motorists. But, drivers face higher prices in some parts of the UK than in others. It said there are significant differences in price between many rural and urban areas.

“These differences may reflect the higher costs of supplying retail fuel to certain areas. However, weak competition in certain parts of the UK may lead to price differences that are unrelated to costs”, it stated.

The CMA wrote: “Taking account of the impact of the high pump prices on consumers, and some of the issues raised by this review, the CMA has decided to initiate a market study into road fuel. The study, to be launched immediately, will enable the CMA to develop a more detailed understanding of how the market is working – at all levels of the supply chain – and consider what more can be done to improve outcomes for consumers.”

Sarah Cardell, CMA general counsel, said: “The recent rises in pump prices are a major worry for millions of drivers. While there is no escaping the global pressures pushing up fuel prices, the growing gap between the oil price, and the wholesale price of petrol and diesel, is a cause for concern. We now need to get to the bottom of whether there are legitimate reasons for this and, if not, what action can be taken to address it.

“On the whole the retail market does seem to be competitive, but there are some areas that warrant further investigation. These include finding out whether the disparities in price between urban and rural areas are justified.

“This area of work is a major priority for the CMA and if we can help, we will. That’s why we are immediately launching a market study that will use our formal legal powers to investigate this in more depth. If evidence emerges of collusion or similar wrongdoing, we won’t hesitate to take action.”

‘Rocket and feather pricing exists’

Jack Cousens, the AA’s head of roads policy, said: “Pump-price competition in the UK is broken. A month of major wholesale price falls without a penny coming off the average pump price of petrol is testament to that.

“It is very welcome and timely that the Competition and Markets Authority probe into road fuel pricing has agreed with the AA that there is a need for further investigation.

“However, the AA argues that the problem is not the gap between the oil price and wholesale price feeding through to the forecourts but the length of time it takes for that wholesale price to be reflected at the pump. The fuel trade has no trouble in passing on rising costs to the customer but lags badly in passing on savings. It has been labelled ‘rocket and feather’ pricing, and it exists.”

Cousens said that pre-pandemic, UK fuel pricing had “settled into a rhythm” where significant wholesale price reductions would start to be passed on in a matter of days by ‘cost-cutter’ supermarkets. That would then trigger other supermarkets and fuel retailers to start bringing down theirs, or find themselves at a competitive disadvantage.

“That trigger appears to have gone, and now there is a need to find another way to re-invigorate pump-price competition. The AA therefore welcomes the CMA’s suggestion of more pump price transparency immediately, something the UK’s biggest motoring organisation has been calling for years,” he said.

RAC fuel spokesman Simon Williams said: “Regardless of the reasons for wholesale prices being what they are we continue to believe there is clear evidence, not least in the last week, that major retailers are incredibly slow to pass on falling wholesale costs, yet quick to pass on rising ones.

“The question drivers may have, however, is how long the review will take and – crucially – when they might see a change to what they pay every time they fill up. As each day goes by and the cost-of-living crisis is felt ever more keenly, the need for retailers – especially the largest ones – to reflect wholesale prices fairly becomes ever more urgent. We urge the government to ensure it’s in a position to scrutinise the relationship between wholesale and retail prices. And where issues are found, it must be able to take action that quickly leads to fairer prices.”

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