Factors inducing sustained low prices of fuels in UK market
Petroleum retail market of UK had gone through different changes and restructure procedures for fulfilling the needs of the market (Lee, Yang and Huang 2012). The International Energy Agency (IEA) has forecasted that oil would play a significant role to fulfil the energy needs of the world. For that reason, The Department of Energy and Climate Change (DECC) has focused on ensuring the quality and scale of the retail petroleum sector so that it can fulfil increasing demand of the market. Majority of the total demand of UK retail petroleum department comes from the transport sector. On the other hand, fuel prices in UK have fallen over the past five years in a significant manner. In this study, the focus would on identifying all the factors that had created impact on the falling prices of fuel. Moreover, it would also focus on assessing the possible direction of the prices of petrol and diesel products in UK market in near future.
As highlighted by ft.com (2017) petrol prices has fall below £1 per litre, while diesel prices also has fallen to 99p per litre. Specifically, prices of oil have fallen dramatically from January 2015 that has created impact on the overall structure of the oil and gas industry. The recent fall in the prices of fuels in UK market regarded as the biggest in history. In fact, the magnitude of fall in prices can only be compared with the financial crisis during the time of 2008-9 (Bodenstein, Guerrieri and Kilian 2012). Several factors have played significant role in lowering the prices of oil or fuels in UK market. The factors are discussed as follows:
Fuel tax is also regarded as exercise tax that is imposed on every unit sale of fuel. Majority of the country focuses on imposing exercise tax on that are intended for transportation. It has been assessed that British government charges higher tax on the fuels compared to other European countries (Nazlioglu and Soytas 2012).
The fact that UK government captures major share of the fuel prices. According to UK Petroleum Industry Association, around 62pc of pump price of diesel and petrol in UK market was made up of VAT and excise duty. However, UK government has reduced the tax rate for the diesel and petrol products, which has created major impact on the overall reduction of fuel price. Cunado and de Gracia (2014) have mentioned the fact that fuel duty is directly related with the economic growth in the UK market. Therefore, reduction in excise duty or VAT on oil prices has created direct adverse impact on the economic growth perspective of UK. In fact, deduction in the tax rate has also reduced the employment opportunity in the oil and gas sector.
According to Steafel (2017), prices of crude oil also create major impact on the retail prices of the petrol and diesel products. Therefore, any changes in the crude oil rate will definitely create impact on the refined products as well. Now, major portion of the crude oil used in UK is imported from different Middle-East countries. For that reason, UK market also has to maintain close focus on the foreign exchange rate, as it will determine the cost of importing crude oil in the country (Scholtens and Yurtsever 2012). It has been assessed that foreign exchange rate in UK has fluctuated in a significant manner, which has created major impact on the fall in petrol and diesel prices.
Tax on fuel
It can be assessed that increasing value of pound in the global market has allowed UK economy to invest lesser amount to purchase desired amount of crude oil internationally (Wang, Wu and Yang 2013). Therefore, it has reduced the money required for completing all the responsibilities of the operational process. Thus, it will in turn allow oil retail organizations to purchase refined petrol on reduced price level. As a result, it has reduced the price level of the petrol and diesel products rapidly.
As highlighted by Kilian and Hicks (2013) international trade can also have major impact on the overall prices of fuel in UK market. Now, the cost associated with the trade depends on the amount of rules and restrictions oil and gas sector organizations will have to face for fulfilling all the business requirements. It has been assessed that innovation of advance technology has helped UK based oil organization to import oil from Middle-East countries in much cheaper prices. Moreover, both UK and Middle-East government has removed different international trade restrictions that also has minimized the amount required for providing refined petroleum products to the customers (Acemoglu, Finkelstein and Notowidigdo 2013). In addition, UK oil and gas companies have received different subsidies from government, which also has minimized the operation cost in a major way. Therefore, it has allowed oil retail organizations to lower the prices of petroleum products constantly.
Prices of oil are one of the prime concerns of the political parties, as it can have impact on the overall development perspective of the economy. For that reason, government of UK has to face huge amount of pressure from different political parties to keep the price level of petrol low. On the other hand, any unexpected changes in the price level can actually create greater amount of vote bank of the ruling party. Reboredo (2012) have highlighted that UK has gone through several political turbulence in recent times. As a result, all the political parties have focused on providing more benefits to all the organizations conducting businesses in different sector. As a result, oil and gas sector organizations have received relatively more subsidies, which have minimized the price level of petrol and diesel products.
According to Reboredo and Rivera-Castro (2013) break up of European Union also has created huge amount of impact on the oil price level. However, the connection between oil prices and Brexit is not obvious but it has created huge amount of threat to the price level of oil. Firstly, Brexit had created an enormous amount of uncertainty over the global financial markets, as it increases the risk level associated with the market break down. Secondly, the European economy has shuffled over the years. However, pre-Brexit political turbulence situation has dented the overall economic growth and also increased the demand level of oil. Thirdly, Brexit also have created huge amount of currency implication, as exchange value of pound and euro has started to fluctuate of a regular basis (Kilian 2014). As a result, it will push capital flows into the dollar that strengthens the greenback, which eventually has depressing impact on oil prices. In the macro picture, Brexit is quite bearish for the oil and the value of dollar has increased that had created impact on crude oil import services. For that reason, it has enforced the prices of petrol and diesel products in a major way. Moreover, it has been assessed that Brexit had slowdown UK economy with a riffle effect throughout the European region.
Foreign exchange rate
In 2016, World Bank states that growth of UK economy has dropped from 2.9% to 2.3% that has affected the GDP amount in an effective way (ft.com 2017). It has been analyzed that Brexit adversely affected UK’s economic growth perspective. Moreover, Brexit also is expected to create different long-term regarding the implication of crude oil within the country. Now, declining economic condition has enhanced the demand for the crude oil in a major way. In addition, UK currency (GBP) has started to strengthen its value from the mid of that year. Concurrently, investors have started look for safe position that will ensure positive returns on the bond. Thus, the Brexit driven currency shifts has affected the prices of crude oil. On the other hand, USD has able to increase its value even after Brexit, which has weakened the prices of crude oil in an effective manner. Studies have mentioned that additional 5% increase in the dollar strength against the basket of currencies had pushed down the prices of crude oil by more than 10% in UK economy (Hassouneh et al. 2012). It has established the fact that Brexit had created major impact in pushing down the price level in a major way.
In January 2016, the spot prices of crude oil were accounted around $27 and crude oil feature was extremely positive. It reflects the fact that crude had to trade up significantly from the late $20s (Macalister 2017). It is also expected that current imbalances between demand and supply of crude in UK market would improve slowly. Therefore, UK economy would not have to face challenges associated with the excessive demand of oil within the economy. Therefore, it would eventually increase the price level to a certain extent. Secondly, there is no possibility of significant political upheavals among the prime oil producers. It is also like to happen that OPEC will develop some sort of agreement to restrict the production at certain level so that it can move up the prices in an effective manner. Moreover, many oil producers in the UK will begun to implement aggressive implementation of hedging strategies to ensure oil price growth in near future.
It has highlighted the fact that UK will able to handle all the present political and economical turbulences in an effective manner. Moreover, it will also able to stabilize the economy from the aftershock of Brexit in an effective way. As a result, oil market is expected to reach close to the equilibrium in near future. It would eventually create steady growth in the price level.
Conclusion:
The world’s economies have started to slow that moderated the growth in crude demand for the coming years. The supply overhang is like to moderate but will not disappear from the economy completely. Therefore, it will induce non-OPEC countries to cut their overall production investments. It has been assessed that Brexit will result some incremental economic fallout that is expected to create further negative impact on overall demand of the economy. Moreover, world’s desire for positive and safety returns in a yield-starved of zero and negative interest rate will enhance the power of US dollar in a continues manner. To conclude, it can be mentioned that drop in prices of oil is temporary, which will increase to the optimum level in long-run.
References:
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