Uk petrol industry

Introduction

UK petrol industry is basically a significant and a dynamic market. Reports by Mergers Commission and Monopolies in 1990 showed that the oil market had experienced various changes. Such changes have been particularly on the UK retail structure in the oil market, which has directly affected the consumers. Apparently, within the petrol market, the retailer is typically obliged to provide a diversified range of services and products to align with the competition level. Oil prices competition not only involves other oil company outlets but also with core supermarket petrol retailers. The operating scale of the supermarkets offers them a cost advantage which has been projected to the targeted customer through competitive pump prices. Consequently, major oil companies and other smaller wholesalers have been compelled to reduce their operational costs in order to tackle this particular challenge (Greenman & Fryer 1990, p. 316).

Petroleum products market

Generally, the UK, major oil products are inclusive of gasoil, kerosene, motor fuels mainly for space heating purposes. In addition, there are heavy fuels oil mainly for the purposes of space heating and power generation (Band 1991, p. 49). Since 1990, the UK number of petrol sites has declined from highs of 19465 to lows of 13043. Basically, this is approximately a drop by a third. Moreover, majority of the closures have resulted from smaller dealers operating independently under own sector.

However, the proportion company average and owned sites in the entire of UK have risen due from efficiency of operations. Furthermore, some sites which are classified to be self service without pump attendants have slightly reduced in the recent years. This has been indirectly or tm some extent directly linked with the world security events or political environment as evidenced by the period between 1997and 2003 (Refer to Appendices A, IV). Approximately 80% of the entire petrol retailing outlets in UK has convenience shops inclusive of restaurants. Consequently, this explains the non-petrol significance revenues increase during the 1990s. However, UK petrol retailing market still appears to be dominated by oil companies including BP, Esso, Shell, Texaco, Conoco and TotalFinaElf (Greenman & Fryer 1990, p. 409).

Generally, this account for 58% of the total retail sites of the ULK Petrol, and hence the witnessed shifts on average prices in key retailing outlets (Refer to Appendices A, II). UK supermarkets apparently have approximately 1041sites which amounts to 8% of the entire petrol sites. In 1990 however, the supermarkets had 290sites which is 1.9% of the total sites. Essentially, supermarkets in general are larger compared to oil companies since they have almost twice of the fueling positions (Harbord & Fehr1993, p. 337). Smaller petrol retailing firms typically have 100 to 500 retail outlets. However, there are approximately 900unbranded and privately owned retail oil shops. In 2000, retail petrol sales amounted to 28billion litres which were slightly lower compared to the 1999sales. Similarly, average capacities of various UK based petrol had steadily increased through 1990s from 1.62million litres in the year 1990 to about 2,12million litres in 2000.

Consumers and the price competition

To the consumers, oil price competition between oil majors and supermarkets has greatly contributed to reduction of oil prices in real terms by approximately a third since the year 1990. Ordinarily, the unleaded petrol price reduced from 15.3p for a litre in the month of February 1990 to about 110.0p for each litre in February 1998. On the other hand, leaded petrol price declined from 15.2p per every litre of petrol to 10.2p in the same period (Wilkinson et al 1992, p. 92). Additionally, various improvements have been observed on ranges and quality value of oil products and services availed by the petrol retailers due to increased competition levels.

However, this vigorous and high competition levels plus increased benefits to the consumers has advanced various costs within UK’s oil industry (Greenman & Fryer 1990, p. 555). To the oil industry in particular, this has implied an increased closures of the formerly existing independent and smaller retail outlets. Primarily, this has resulted from the decline in the industrial profit margins from the previous levels. In addition, oil companies have been reviewing their networks, products offer and strategy of operation. Essentially, it’s necessary to acknowledges that such pressures have instigated uncertainties and hardships for most of the petrol wholesalers or retailers.

Moreover, those firms feel that the oil site closures especially within the isolate regions should possibly result to adverse effects on the local communities (Band 1991, p. 152). Generally, higher petrol prices at the rural areas pumps reflected reduced sale volumes plus proportionate increased unit and distribution costs. For example, majority of the 4 to 5 p for every litre of petrol price differentials between the North-West of Scotland and the rest regions of UK have been facilitated by the increased petrol prices. Any other particular price differential has been contributed by the intense competition level within the urban areas which has developed in the recent years. UK oil market review has taken its evidence from the market major players and also from other players inclusive of the present smaller independent retailers. Data collected by Research Associates of the National Economy (i.e. NERA) revealed that at this particular time the market was competitive and therefore no interventions were required unless proven otherwise since the industry monitoring would continue (Linde 2000, p. 144).

Current oil industry competition in UK

Apparently, according to the annual report, UK oil companies are being observed to be lagging behind on international competition. Moreover, The Association of UK offshore Operators (i.e. UKOOA) made claims that the record prices could possibly not offset the rising costs related to exploration and recovery. In addition, Middle East uncertainties are being said to make the situation even worse. However, Trade and industry Department (i.e. DTI) assured that they were working hand in and with the oil industry in ensuring UK Continental Shelf maintained their competitiveness (Morgan & Clarke 2006, p. 120).

Furthermore, UKOOA reports stated that in absence of the government policy change, significant proportion of UK’s reserves could remain underdeveloped. In addition, it has been observed that there has been a huge escalation of costs currently. Over the last two years, several rig rates have trebled while other rates have been raised six times for the semi-submersibles resulting to critical cost challenges. Globally, there is also competition for the available resources including the human and physical resources causing competition pressures to the UK oil industry (Robinson 2006, p. 118).

Fair Trading Office report on competition

In May 1998, Fair Trading Office (i.e. OFT) of UK presented the report on the petrol supply competition in UK. However, the review did not com across any evidence to imply that UK petrol prices were a reflection of collusive or predatory behaviors on the side of retailers or suppliers. In this year, the market was found to be operating competitively to benefit the consumers and no interventions were really required at that particular time. Nevertheless, the OFT had a responsibility to monitor this competitiveness to ensure that it did not change negatively. Prices of diesel and petrol in July 2000 within the Highlands and the Islands showed that there were possible exceptions to the Western Isles. In this region, there is no particular evidence of anti-competitive behaviors of the oil industry (Borrie & Aaronson1996, p. 16).

Moreover, pump prices made a reflection of the oil market conditions. Subsequent to the allegations expressed by the independent petrol retailers on the oil company differentiated oil pricing, OFT made an enquiry into diesel prices and wholesale petrol (Harbord & Fehr 1993, p. 424). Findings revealed that combinations of increased world oil prices and the public pressures on the UK oil prices were facilitated by diesel squeeze and the petrol margins but not by the anti-competitive conducts related to major oil companies. However, OFT was to continue monitoring UK market of motor fuels at a close range, Consequently, actions are to be taken if any firm within the UK oil industry would be found deliberately damaging the competition.

Oil and Gas companies’ mergers

A senior Democratic senator made proposal of a legislation which was aimed at making it difficult for gas and oil mergers to be approved by the US antitrust authorities. Herb Kohl claimed that this bill would demand companies wishing to undertake mergers to prove that their merge proposal would not at all hobble competition in the oil market. Basically, this bill was proposed in response to the wave of gas and oil mergers since 1990s in. Ordinarily, those mergers led to substantially reduced competition levels within the oil industry, particularly in UK (Wilkinson et al 1992, p. 102).

Consequently, the reduced competition of the UK oil industry directly resulted to increased prices of gasoline causing the government to intervene (Greenman & Fryer 1990, p.673). Moreover, soaring profitability margins of the UK oil industry are conclusive evidences of minimum competition. Additionally, the price of crude oil has had an increasing trend amid a strong global demand particularly due to the growing economies of China and India. Similarly, this has lead to increased concerns associated with future oil supply disruptions. However, the increases in prices were partly concluded to emanate from the current industrial consolidation. For this reason, any merger that would be approved had to prove that it would do no harm to the oil industry competition

Domestic energy supplies competition

Domestic energy market of UK became wholly open to competition activities in the month of May 1999. According to the DTI survey of the domestic competition, a number of customers switched their oil suppliers (Band 1991, p. 116). Primarily, this survey was introduced at the start of 1998 obligated with monitoring developments and oil prices in the increasingly complex oil market. Observations reveal that competition has continued to have great impacts on the oil markets.

Towards the completion of June 2000, approximately 5.6million consumers of gas which is 28% no longer got their gas supplies from UK. Actually, they had shifted to one of the 26new gas suppliers who had been licensed in serving the domestic market. By the completion of June 2000, 4.4million consumers of electricity which is 18% were no more utilizing their local electricity supplier. Apparently, there exists 17compnies in UK which are licensed in supplying domestic electricity (Linde 2000, p. 155).

Currently, there is a growing and large tariff selection which is available with diversified features. For example, the market has tariffs without standing charge, green tariffs linked to the environment and dual fuel tariffs which enable consumers to purchase electricity and gas from a similar supplier. Moreover, the gas office is working on easier ways for consumers to compare the diversified tariff offers. I addition, the government has been publishing consultation document related to their propose strategy in tackling fuel poverty problem (Morgan & Clarke 2006, p.214). In essence, some suppliers have already launched tariffs aimed particularly the fuel shortage to support this strategy.

Prices, bills and market penetration

Generally, new entries into the UK oil market ordinarily provide for reduced oil prices. New suppliers within the electricity market which is inclusive of the former public electricity suppliers competing in other areas offer reduced prices compared to the incumbent suppliers (Robinson 2006, p.111). The number of consumers who have switched suppliers has tremendously increased following the advent on a full competition for the UK oil market. However, the proportion of consumers switching suppliers has been observed to vary on the basis of the type of payment. Essentially, consumers paying by use of direct debit were more likely to switch suppliers as compared to those paying on credit basis.

Oil Industry Competition and the increased employment

UKOOA made calls to the UK energy minister to facilitate proper development and promotion of the energy policy. However, DTI claimed that the government was well aware of the challenges facing the UK oil industry including the increasing operating costs. Essentially, this is being claimed to be a worldwide issue transpired by high activity levels plus the specific issues faced by the UK gas and oil industry while the North Sea is continuing to mature. Moreover, the latest economic report which reflected successful performance in the oil industry resulted from government initiatives which involved the licensing of the system innovations and the industry practice code so as to enhance the UK commercial environment. In addition, there were forecasts of increased employment opportunities across the oil industry in the year 2006 to about 380000people. Primarily, this was an indicator that despite the existence of the challenges within the oil industry, the sector is particularly seizing opportunities in realizing the full potential of the North Sea (Borrie & Aaronson 1996, p.22).

IV: World Events and Crude Oil Prices 1997-2003

References

• Borrie, G. & Aaronson, R 1996, The future of UK competition policy, Institute for Public Policy Research Publishers, Washington, DC

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• Robinson, C 2006, Regulating utilities and promoting competition: lessons for the future, Edward Elgar Publishing Publishers, Cheltenham UK.
• Morgan, E. & Clarke, R 2006, New developments in UK and EU competition policy, Edward Elgar Publishing Publishers, Cheltenham, UK.
• Linde, C 2000, The state and the international oil market: competition and the changing ownership of crude oil assets, Springer Publishers, Warren, MI.
• Band, G 1991),’ Fifty years of UK offshore oil and gas’, The Geographical Journal, vol.157, no.2, pp. 179-189. Retrieved on May 27th 2010 from: http://www.jstor.org/stable/pdfplus/635275.pdf
• Greenman, J & Fryer, M 1990,’ Estimating the Oil Reserve Base in the UK Continental Shelf’, The Journal of the Operational Research Society, vol. 41, no. 8, pp. 725-733. Retrieved on May 27th 2010 from: http://www.jstor.org/stable/pdfplus/2583477.pdf
• Wilkinson, B., Oliver, N &Turnbull, P 1992, ‘Buyer-Supplier Relations in the UK Automotive Industry: Strategic Implications of the Japanese Manufacturing Model’ Strategic Management Journal, vol.13, no. 2, pp. 159-168. Retrieved on May 27th 2010 from:

  http://www.jstor.org/stable/pdfplus/2486412.pdf

• Harbord, D & Fehr, N 1993, ‘Spot Market Competition in the UK Electricity Industry’,
• The Economic Journal, vol.103, no.418, pp. 531-546. Retrieved on May 27th 2010 from:

  http://www.jstor.org/stable/pdfplus/2234530.pdf

Websites Sources:

• http://news.bbc.co.uk/2/hi/uk_news/scotland/north_east/5193950.stm
• http://news.bbc.co.uk/2/hi/business/2960825.stm
• https://www.og.decc.gov.uk/downstream/competition/index.htm
• http://www.ftc.gov/os/2000/03/opectestimony.htm