Fuel Prices

Iain McKenzie Excerpts

Wednesday 21st January 2015 Westminster Hall

[Mr Iain McKenzie (Inverclyde) (Lab)]

It is a pleasure to serve under your chairmanship, Sir Roger. I am delighted to have secured this debate, although a longer debate would have given other Members an opportunity to contribute. My constituents are not the only ones to have had problems with fuel pricing, and other Members might have highlighted other areas of the country that are having the same problem.

I will highlight three matters that affect fuel pricing across the country to the detriment of motorists. The first is pricing at the pump and the lack of competition. The second is the supply chain and where profits and investments are being made in that supply chain. The last, but by no means least, as my speech will show, is taxation on fuel.

I acknowledge that, at last, we are seeing average petrol prices going back to the levels last seen in the autumn of 2010. However, we are being told and led to believe that that is due to an intense pump price battle between supermarkets and independent retailers. If that is true, my constituency of Inverclyde is certainly not witnessing it. Our prices remain higher than in areas outwith Inverclyde’s boundaries. My constituents would like to take issue with that, and it would seem that we are not alone. There remains significant variation in petrol prices across the country, even between neighbouring communities. Unbelievably, there can be substantial variation between the price of fuel at the pump over very small distances, and my constituents suffer from that. Fuel prices at the pump in Inverclyde can be 3p to 4p more than at forecourts just 15 miles away, and we are probably not the only area of the country that is witnessing such price differences within such a short distance.

Why are prices so variable from community to community? In the past decade, especially in my area, large supermarkets have moved in to dominate the forecourts, with many independent and even oil company-owned fuel retailers closing their roadside filling stations. The Petrol Retailers Association has told me that 900 independent retailers across the country have closed in the past five years. In Inverclyde, 14 independent filling stations have closed in recent years, leaving only two independently operated BP filling stations and, of course, two very large supermarkets. The supermarkets moved in, sold off fuel cheaper than the small independent fuel retailers and ended the competition from those small outlets.

[Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)]

The hon. Gentleman describes the experience of many people throughout Scotland, particularly rural and island Scotland. He probably agrees that the volumes of fuel going through service stations will affect the price that the stations have to charge, but does he further agree that there is a lack of transparency in the whole fuel chain from the refinery to the forecourt? It is opaque, so it is difficult to see what is happening and who is taking what fraction of the cost all the way through.

[Mr McKenzie]

The hon. Gentleman makes a good point, which I will emphasise later in my speech. We need to focus on that issue as much as on competition.

Not all the independent retailers that closed were small fuel outlets; in my area many were owned by well-known oil companies such as BP, Texaco and Esso, whose outlets are now scarce. In fact, some have vanished entirely from our roadsides, and it can be difficult to understand the pricing of those that remain. A classic example is the two BP filling stations in my constituency, which are within three miles of each other. Unbelievably, their prices vary by 3p. Work that one out. However, BP tells me that it franchises the filling stations and allows the franchisees to set their own pump price, and therefore there are differences, although the public will look at the name on the forecourt and assume that they are run by the same organisation. Remarkably, the prices at those two franchise filling stations are always higher than at the supermarkets. How much longer will they be trading?

[Jim Shannon (Strangford) (DUP)]

I congratulate the hon. Gentleman on securing the debate. This issue burns for people in my constituency, because the cost of fuel is enormous for those who need a car to get to work, social activities or school. Does he share my concern that, whenever fuel prices rise, within 24 hours the forecourt prices go up, yet when there is a massive decrease in fuel prices—oil is down by some 60%—we do not see a drop in prices at the forecourt? Why is there such an emphasis on cost when fuel prices go up but not when they come down?

[Mr McKenzie]

The hon. Gentleman makes a good point. We have seen that in the energy market, too. The blame is always placed on the wholesaler, but the problem is that we do not have evidence to substantiate whether that is where the blame should lie. I will go on to ask the Government to investigate the wholesale price of petrol.

The supermarkets have a much-voiced three-mile radius of competition—they tell us that they will match prices within three miles of each large supermarket. Of course, for my constituents that realistically means matching prices with themselves, because there is no one in that radius to challenge them on their pricing. Is that competitive? No, because competition was killed off many years ago.

In early November 2014, Asda, Tesco, Sainsbury’s and Morrisons all rushed out plans to cut prices at the pumps by 1p a litre. In stark contrast, the RAC called for a further 4p cut in unleaded and 2p cut in diesel, to be fair to motorists. The campaign group FairFuelUK has called for a Government inquiry to get to the bottom of the price fluctuations in fuel. Will the Minister consider adopting Labour’s calls for the Competition and Markets Authority to start the process of launching an inquiry into petrol pricing on the forecourts? She might want to support the Road Fuel Pricing (Equalisation) Bill, which the hon. Member for Wyre Forest (Mark Garnier) introduced yesterday using the ten-minute rule. At a time when we are asking the Government to look favourably on protecting dairy farmers from supermarkets, why not protect motorists, too?

The next area that I would like to explore is the supply chain from extraction, refining and transport to the pump. Just where are profits and investments being made? Can we identify where the price is being hiked? As we have seen in the past couple of months, the oil price per barrel has dropped significantly. My rough analysis of the supply chain suggests that exploration costs make up about 5%, capital costs—leasing buildings and rigs, and so on—make up 20%, and paying staff and transport costs and so on makes up 10%. Then there is tax of some 40%, and oil company profits make up the final 25%.

[Mr MacNeil]

The hon. Gentleman is being kind and generous with his time. He has mentioned tax. As the price goes down, tax becomes a larger share, and the Government have a role to play in that. Is it not iniquitous that, in small places with lower volumes of sales and where higher margins are required on each litre of fuel, VAT is also charged? Small rural places are paying more tax per litre—the islands certainly are—than the big cities that have the advantages of large volumes of sales and tough competition between supermarkets.

[Mr McKenzie]

I thank the hon. Gentleman, who mentions the VAT hike that the Government placed on fuel when they came to power in 2010. He also mentions the islands. I was contacted by an islander the other day who said that fuel was being transported to the island to supplement the price.

In the past couple of months, the oil price per barrel has dropped significantly. However, as we have already discussed, the wholesale price—the cost of production and refining—is calculated at 22p per litre on fuel that costs 109p. We need to investigate the supply chain to see whether that is the case.

What of the failure to reduce costs as quickly as they are increased? I have highlighted the problem in the domestic energy sector—we had a debate on that the other week—whereby companies pass on wholesale price increases quickly, but not wholesale price drops. Energy companies always announce their price hikes by blaming the wholesale prices, but when wholesale prices fall, they never seem to pass the savings on to customers quickly. We seem to have the same problem with fuel—reduced costs are apparently not being passed on promptly to the consumer on the forecourt.

Oil prices, as I have said, have fallen by about a third since the summer of 2014. Campaigners say that prices are quick to increase when wholesale costs increase, but when wholesale costs go down, prices decrease slowly. We need to investigate that to see whether evidence shows that that is indeed the case, and whether wholesalers are to blame. The AA has called for transparency in the supply chain and for the Government to make petrol wholesalers reveal their prices. It says:

“Consumers can see the price of oil and they know how much they pay for petrol but they do not know the cost of wholesale, which means that petrol retailers cannot defend themselves when they are accused of not passing on price cuts.”

There was an investigation into petrol prices by the Office of Fair Trading, and in 2013 it published its study, which stated that the fuel market was working fine. However, that was not a formal inquiry, and many motoring organisations were dissatisfied with its conclusions. The Petrol Retailers Association considered the report substantially flawed owing to the fact that it did not investigate anti-competitive pricing by oil companies, or by supermarkets that subsidise fuel with margins from groceries to eliminate competition and enjoy a monopoly in the fuel market.

It is also worth noting that, in August 2013, the European Commission started a high-profile investigation into alleged oil price fixing by certain oil companies and traders. That involved dawn raids on oil companies in places as far afield as Norway, Holland and London. We have heard very little from the Commission on the findings of its investigation and, given the inadequacy of the OFT report, we need to have an open and transparent look at where profits and investments are being made. It looks as if we need to apply something similar to Labour’s proposals for the energy regulator to enforce an immediate, fair and proportionate price reduction.

Finally, I will look at Government taxes levied on fuel. The largest portion of a fuel bill goes to the Government: with petrol priced at 109p a litre, fuel duty is 58p and VAT is 18.2p of that. Fuel duty has been frozen since March 2011 and it looks like it will remain so—hopefully—until at least May 2015, but it still makes up a hefty chunk of the cost. More than 60% of what motorists pay goes to the Exchequer in fuel duty and VAT. According to FairFuelUK:

“The Treasury hides the staggering fact that the UK still has the highest level of percentage taxation on road users in the EU for diesel and the second highest for Petrol. The Chancellor currently takes considerably more at the pumps for diesel in tax than any other EU Finance Minister.”

The Petrol Retailers Association believes:

“The main reason pump prices have not fallen in line with crude oil is due to the high proportion of Government tax levied on fuel.”

What of Labour’s record in office on fuel duty? According to the House of Commons Library, under the previous Labour Government the percentage of the cost of a litre of fuel paid in tax fell from 75% in 1997 to 65% in 2010. In contrast, between 1990 and 1997, under the Conservatives, it rose from 59% to 75%. In government, Labour announced the postponement of fuel duty increases on several occasions—in total we postponed increases or froze fuel duty in real terms 13 times. The coalition is in government now, so I ask the Minister to discuss with her Treasury colleagues at the very least to drop the extra tax from their VAT hike on fuel.

[Mr MacNeil]

I am hearing the hon. Gentleman waxing lyrical about the former Labour Government. I was trying to bite my tongue, but I have to remind him of the fuel duty escalator that they were quite happy to use. Is it now a source of shame to him that his Government did not introduce a rural fuel derogation that would have helped island and remote areas, despite being asked for that for four or five years? They could and should have done that, but they refused. Under pressure, this Government have now done that, but that was an opportunity lost by that Labour Government.

[Mr McKenzie]

As the hon. Gentleman will be well aware, the fuel duty escalator introduced by Labour was a green tax to put funds into green energy. Unfortunately, that idea has never been taken up. We heard from this Government that they were to be the greenest that we had ever seen, but they are not by some margin.

Let me now focus on why we need to reduce fuel costs. Apart from the obvious—reduction in transport costs for goods, and increasing employment—large numbers of workers rely on a car to get to their place of work. They have no choice in that, especially with the price of rail travel as it is today. Petrol and diesel are simply unavoidable, essential costs for millions of motorists and businesses—90% of people in employment say that they have no choice but to use their car to get to work, and 44% also use their vehicle when at work.

In a recent survey of small and medium-sized enterprises, one in 10 said that they were making staff redundant owing to high fuel prices, and two in 10 said that they had stopped recruitment. Car-owning households are estimated to spend a high percentage of their disposable income on running a vehicle. Again, car ownership is not a luxury but an essential part of modern life. Let us not forget that public transport in the form of bus and rail travel must also reduce in price if oil prices are falling.

In conclusion, I ask the following of the Minister. We need an open and transparent inquiry into fuel pricing. We need more parity on fuel prices at the pump and an end to the ridiculously small radius for competition and price comparison. Fuel wholesalers must be made to reveal their prices, because that will allow retailers to defend themselves when they are accused of not passing on cuts.

At the very least, we need a further freeze in fuel duty. In view of the continuing cost of living crisis and the low rate of inflation, there can be no justification for an increase—if anything, there should be a reduction. Finally, the Government should return the rate of VAT on fuel from 20% to the level it was before they came to power in 2010. I am in danger of showing my age here, but if the British motorist was to sit down and work out how much they paid for a gallon of petrol, they would be appalled.

--- Later in debate ---

[Amber Rudd]

I beg to differ. There has been quite extensive coverage in the newspapers—there certainly has been in my local newspaper—about where there are different prices for petrol, and the fact is that people are seeing a reduction in the price of petrol. The hon. Gentleman will be aware that although the price of oil has a big impact on the price of fuel, it is not, as the hon. Member for Inverclyde said, the only element in the price of petrol. Duty also plays a large part, and I will make some comments about that in due course. Nevertheless, the oil price fall is beginning to have an impact. I am delighted to take part in this debate today, but it is wrong to suggest that the public are not aware of the changes.

[Mr McKenzie]

Is it not the case that the evidence the Minister is basing her argument on—the investigation by the OFT—has been criticised for being flawed?

[Amber Rudd]

I am afraid that the evidence tends not to please everybody. If the hon. Gentleman disagreed with the evidence, I am sure he made that clear at the time. There are groups that would disagree with it; whether that is because they do not like the conclusions of the report or because they doubt the evidence is always open to debate.

Let me say a little more about the 2013 call for evidence; it is relevant to this debate, because it reassures hon. Members and members of the public that we have addressed this issue and looked into it. The OFT analysis found that in August 2012, for example, there was a difference between rural and urban prices; I know that is of particular concern to the hon. Gentleman. Her Majesty’s Treasury engaged with the European Commission to approve the Government’s application for 17 of the most rural areas on the UK mainland to receive a 5p per litre fuel duty rebate. That rebate is targeted at remote areas of the UK that face particularly high pump prices.

--- Later in debate ---

[Mr McKenzie]

I encourage the Minister to comment on the supermarkets’ radius of competition; as I highlighted, in certain parts of the country it is ridiculously small. In those areas, they are competing with themselves, and only themselves.

[Amber Rudd]

The hon. Gentleman’s point about supermarkets is interesting. However, the same is true of fuel as of other products, and the fact that supermarkets compete with one another demonstrates that competition is effective and keeps prices low.

I will just make a quick comment about fuel costs, as the hon. Gentleman commented on the role of the previous Government. In 2011, the Government abolished the previous Government’s fuel duty escalator; we cut fuel duty by 1p a litre in March 2011; and we have scrapped four planned increases in fuel duty during this Parliament. By the end of this Parliament, fuel duty will have been frozen for nearly four and a half years, which will be the longest fuel duty freeze for more than 20 years. The Government are taking action to protect the consumer by keeping fuel duty at a manageable level while ensuring that we concentrate on the overall need to stimulate our economy and constantly reduce the deficit.

[Mr McKenzie]

Will the Minister give way?

[Amber Rudd]

I have a few more points to make, so I hope the hon. Gentleman will forgive me for not giving away.

I reassure hon. Members that, although the price drop is being passed on, we expect more from the fuel providers. We will watch oil companies carefully to ensure that they continue to pass on the falling oil price, which benefits both consumers and the wider economy. Consumers and motorists are entitled to the best value for money, and the Government are determined to ensure that they get it. We will keep this issue constantly under review, and we welcome the impact that it is having on consumers and their weekly costs.