Memorandum submitted by Esso Petroleum
In this document, Esso will show that UK after-tax
pump prices are the highest in Europeby a significant margin
in the case of diesel fuel. On a before-tax basis, however, UK
prices are amongst the lowest in Europe.
The submission also demonstrates unequivocally
that the rise in pump prices since January 1999 has been a consequence
of rises in duties and taxes and a decline in the value of sterling
relative to the US Dollar as well as increases in the cost of
the raw material. The margin between the wholesale price and the
retail pump price (the gross wholesale-retail (WR) margin) upon
which a retail fuel marketer's business is based has, in fact,
declined over this period.
Esso is not in a position to comment on the
overall impact of current levels of motor fuel taxation on the
competitiveness of UK enterprises.
If, however, it were decided that a reduction
in duty rates targeted at the haulage industry was an appropriate
policy to pursue, Esso would prefer a system of a duty rebate
along the lines of the existing rebate available to public service
vehicle operators. The efficacy of such a scheme would be improved
if Customs & Excise accepted delivery invoices issued through
fuel card schemes as valid documentation for recovering duty (as
is already the case with VAT recovery). Esso does not see the
introduction of "blue diesel" as an effective policy
measure owing to the significant costs associated with the segregation
of an additional fuel grade through the distribution system.
Esso Petroleum Company Limited (Esso) is the
downsteam UK subsidiary of Exxon Mobil Corporation, which was
created in December 1999 through the merger of Exxon and Mobil
Around one vehicle in six is fuelled through
our network of around 1,500 service stations. Esso also has a
one seventh share of the industrial and wholesale market, delivering
to approximately 1,100 customers at 15,000 delivery locations.
Through a national network of Branded Distributors, we supply
the small industrial and commercial markets.
The Select Committee inquiry into "the
impact of current levels of motor fuel taxation on the competitiveness
of UK enterprises" is not an issue upon which Esso is in
a position to comprehensively comment.
Transport costs are only one element affecting
UK business competitiveness. Other factors include the general
level of business taxes, the legal and regulatory regimes, wage
levels, foreign exchange and interest rate policy, the cost and
availability of capital and social welfare costs. Similarly, motor
fuel taxation is only one element of transport costs.
This submission therefore focuses on those issues
upon which Esso is in a position to comment. It addresses:
an up-to-date survey of road fuel
prices across Europe on a before and after tax basis.
an analysis of how pump prices have
changed from the $10/bbl crude oil price environment of early
1999 to today's $35/bbl environment.
some specific comments on potential
policy options upon which Esso has views which may be helpful
to the Committee if it does indeed conclude that high levels of
motor fuel taxation are adversely impacting UK competitiveness
and that selective reductions (as opposed to across the board
options) to, for example, the road haulage sector are appropriate.
Shown below are graphs developed from data collected
by Oil Price Assessments Limited (OPAL), a UK based consultancy.
The charts show average pre- and post-tax pump prices for unleaded
Euro Premium petrol (UL (95) and diesel (ADO) in the major markets
of Europe for the month of September 2000.
The graphs show clearly that including duty
and Value Added Tax, UK UL 95 prices are the highest of our nearby
trading partners. This is even more pronounced in the case of
ADO where UK pump prices are a minimum of 22 pence per litre (£1.00
per gallon) higher than anywhere else in the survey.
On a pre-tax basis, however, UK UL 95 prices
are the lowest in the European countries surveyed while only Portugal
(where pump prices are effectively Government controlled and a
cross-subsidy between petrol and diesel artificially deflates
the pre-tax ADO price) currently has lower pre-tax ADO prices.
The message is therefore clear. If UK business
is being put at a competitive disadvantage through high fuel costs,
then the issue is one of the high level of fuel taxes in the UK
and not pre-tax fuel costs.
It should also be noted that issues of competitiveness
extend beyond the EU. The United States, for example, is a significant
trading partner of the EU and the low fuel prices there resulting
from low rates of tax will impact relative competitiveness.
JANUARY 1999 VERSUS
The interplay of crude oil prices, wholesale
petrol and diesel prices, duty, VAT and gross WR margin can best
be illustrated by analysing market conditions in January 1999,
when crude prices averaged $10.00/bbl and early-October 2000,
when crude prices were around $34.00/bbl. The analysis outlined
below has been developed using public domain data and is not commercially
sensitive. It is a generic example which does not necessarily
reflect the actual costs and margins of ExxonMobil or any other
The first chart examines developments in UL
95 prices over the period.
The rise in raw material costs from 5.2 pence/litre
to 16.1 pence/litre in part reflects a rise in Rotterdam cargo
market prices (published daily in, for example, the "Financial
Times") from $116.4/tonne to $314.5/tonne. Though there is
a close link between crude oil and oil product prices, the link
is not a mechanistic one. Prices for individual products are subjected,
for example, to specific supply/demand pressures. It should also
be noted that oil products are typically traded in US Dollars
and that over the same period, Sterling weakened against the US
Dollar from $1.65=£1 to $1.45=£1, thereby further increasing
the raw materials price expressed in local currency. To be specific,
of the 10.9 pence/litre rise in the raw material cost 8.8p (81
per cent) results from the higher cargo market price and 2.1p
(19 per cent) from the exchange rate weakening. The increase in
duty reflects the duty rate changes imposed in the March 1999
and 2000 Budgets while the VAT component reflects 17.5 per cent
of the final pump price. The gross WR margin is simply the difference
between the pump price and the sum of the raw material, duty and
VAT costs. A number of organisations publish average pump price
data, including the Automobile Association, the Society of Motor
Manufacturers and Traders and the Department of Trade and Industry
(monthly, in Table 30 of "Energy Trends").
Again, the message is clear. Pump prices have
risen because the price in US Dollars of the raw material has
risen. The fall of sterling against the US dollar has magnified
this impact when raw material costs are expressed in UK pence
per litre. Duty rates have also increased over the period. VAT,
being an ad valorem tax, also magnifies any increase in pump prices.
Despite a rise in pump prices of around 15p/litre, the gross WR
margin over this period has in fact fallen significantly.
The gross WR margin has to cover the cost of
getting the product from the refinery, storing it in a distribution
terminal, trucking to the service station, and contributing to
the operating and overhead costs of the service station. Other
cost elements which need to be covered by the gross margin include
advertising and promotional costs, additives, bad debts and the
costs of merchant fees on credit and debit cards transactions.
Only the balance is available as profit for the retailer and oil
company. The above analysis shows that, far from improving margins,
the failure of average pump prices to match rises in raw material,
tax and duty rates has, on average, resulted in lower margins.
A number of public domain studies (most noticeably by the Office
of Fair Trading in May 1998 and again in July 2000 in their report
"Petrol and Diesel Pricing in the Highlands and Islands")
suggest that in this fiercely competitive market the long term
average gross WR margin has been around 5p/litre.
The chart above shows a similar picture for
diesel fuel (ADO). The larger proportionate rise in ADO raw material
costs, reflects market pressuresspecifically the increased
demand for heating oil (the primary alternative use for this material)
as stocks are built in advance of the northern hemisphere winter.
The gross WR margin here is squeezed to the extent that the pump
price barely covers raw material, duty and VAT costs.
A number of options to reduce the cost burden
on road transport users generally and the road haulage industry
in particular have been suggested. We feel it may be helpful to
comment on some of these options.
(a) Lower Excise Duties for Petrol and Diesel
for all users
Road fuel duties are levied at a high rate relative
to other levels of taxation. In addition to raising revenue, successive
governments have justified high road fuel duty rates on a variety
of environmental grounds. A number of commentaries on this issue
have been produced, most recently by Professor Stephen Glaisterand
The Institute for Fiscal Studies.
Both point out the limitations of road fuel duty as a policy instrument.
Given these limitations, lowering excise duties for petrol and
diesel for all users is, by definition, an effective way to reduce
cost burdens on road transport users. This scheme would be administratively
easy to put in place, the oil industry having implemented some
23 duty rate changes (primarily increases rather than decreases)
over the last 20 years.
(b) Lower Excise Rates for Diesel Only
Similar comments to option (a) apply. However,
such a proposal would leave the limitations associated with high
levels of petrol duty unaltered. The reduction would, however,
be more targeted at the tradeable goods sector if UK competitiveness
were a key policy goal. The market for passenger car diesel fuel
versus petrol would, however, be further distorted.
(c) "Blue diesel"
It has been suggested that a lower rate of duty
for diesel fuel specifically used by hauliers could be implemented.
The current "red diesel" scheme might be extended to
create a "blue diesel"a fuel which would carry
a lower rate of tax than is currently the case but which would
be higher than the rate available for off-road use. A different
dye marker would be used to differentiate the fuelwhich
would only be made available to bona-fide hauliers.
Duty is paid, and hence the product dyed, as
it leaves a bonded area (typically a refinery). Such a proposal
would therefore require a new segregated distribution to be set
up in refineries and distribution terminalswhich potentially
would be costly. Many retail forecourts would be unable to offer
an additional grade of fuel as segregated tankage and pumps are
not available. If forecourt facilities could be made available,
it would be at the expense of providing a speedy and flexible
service to non-haulier customers. The retailer would not be able
to verify that the user is entitled to access to the lower duty
product and it is not therefore obvious who would police such
It is therefore highly unlikely that more than
a minority of retail outlets would be able to offer the service
even if the cost proved acceptable.
To take full advantage of the lower duty rate
would therefore mean that many hauliers would have to return to
a higher level of dependence on self-storage. This may actually
significantly reduce the effectiveness of any favourable tax treatment
since they would have to bear the costs of the storage and pumping
facilities and carry the inventory costs.
There would also be an increase in the risk
of theft and non-approved use.
(d) A Duty Rebate for Hauliers
Such a proposal would potentially simply be
an extension of the existing scheme whereby bus operators receive
a duty rebate. Bus companies currently pay the full duty to the
oil companies and claim back 75 per cent of the duty on a quarterly
basis for mileage specifically designated as "stage carriage"
or bus stop routes. Typically we understand that more than 90
per cent of a bus company mileage is subject to this rebate. This
system has no additional administrative burdens for retailers
and oil companies and presumably any extension of the scheme could
be applied to haulage companies.
Without additional measures, however, such a
scheme would only work effectively were hauliers to resort to
self-storage as existing systems do not permit the rebating of
duty on fuel card purchases at service stations. The proposal
would therefore have a number of the disadvantages of the "blue
diesel" scheme outlined above.
Such disadvantages could, however, be overcome
through the use of fuel purchase cards. HM Customs & Excise
accept delivery invoices issued under this scheme as an acceptable
record against which VAT can be reclaimed. Were HM Customs &
Excise to accept that such a record could also form the basis
of a duty rebate, hauliers would be able to continue to lift from
service stations and claim a duty rebate. The systems necessary
to implement such a proposal are already in place in Esso and
no additional administrative burden would be imposed on either
the haulier, or the retailers.
Therefore, a possible extension of the bus rebate
scheme on the lines outlined above would be preferable to the
"blue diesel" scheme.
27 October 2000
1 "The effect of fuel prices on motorists",
Glaister and Graham, Imperial College of Science, Technology and
Medicine, London, September 2000. Back
"The distributional effects of taxes on private motoring",
Blow and Crawford, The Institute For Fiscal Studies, Commentary
65, London, December 1997. Back