Examination of Witnesses (Questions 1
TUESDAY 31 OCTOBER 2000
Chairman: As they used to say on Listen with
Mother, once we are all seated we will begin.
Mr Laxton: Before my time.
1. I am conscious, gentlemen, that you are all
equal in status. There is no-one who is a leading spokesman so
perhaps, contrary to the usual procedure, we will start with Mr
Mumford, if you can introduce yourself, and then work your way
(Mr Mumford) I am John Mumford. I am the Director
of BP Oil UK which is the marketing and refining company in the
(Mr Polkey) I am Steve Polkey for Esso.
I am a main Board Director with responsibility for marketing.
(Mr Jones) Gary Jones, Total Fina Elf UK, Managing
(Mr Brinded) Malcolm Brinded, Chairman of Shell UK
and member of the Fuel Task Force.
(Mr Codd) David Codd. I am the Managing Director of
2. Thank you. I think you understand, gentlemen,
that we are not here this morning directly to quiz you as to why
you charge so much or, indeed, so little for the petrol you sell
as to try and establish the impact of changes in duty and the
way it impacts on prices and the effect that has on what you might
say is UK plc. Obviously there will be specific questions which
will arise and they may well refer to the experience of last month
and they may well refer to questions. Now I realise that as an
industry you are always at pains to point out that there is no
such thing as a cartel, it is something which is totally absent
from your lexicon. As far as we are concerned we recognise that
you wish on occasions to make your own points in your own way.
If we can avoid undue repetition, I am fully aware of the fact
that there is no one of you to speak on your behalf. Maybe we
could start off with the first question and the first person who
catches my eye will be the person who kicks off. We know there
have been upward changes in fuel taxation at least until the last
Budget where it rose, but not quite so steeply. What effect does
fuel taxation have upon your competitiveness and is it a greater
impact than changes in the price of a barrel of crude, if we could
have the two things put together? Now who would like to start
off, please? Mr Codd, since you laughed most you can start first.
(Mr Codd) In terms of the increases in fuel duty,
the only observation I would like to make is that the most recent
study of which I am aware, which is the AA UKPIA Study by Glaister
and Graham, argues very forcefully that raising fuel prices only
has a very modest effect on fuel consumption. In terms of the
impact on our competitiveness downstream, I would argue it is
relatively modest and not at all comparable to the impact that
rises and falls in crude oil prices have.
3. You guys would say basically that it does
not matter what the level of taxation is within reasonable parameters
because people will keep buying it in amounts which keep you happy?
Is that a reasonable way of putting it?
(Mr Brinded) I think it is right to say that at current
levels we do not see the demand changing hugely as either tax
has gone up or down or as crude oil prices go up or down. It is
relatively inelastic, it does obviously change. That is not to
say we do not recognise that levels of fuel taxation clearly impact
on the businesses that are purchasing fuel and the customers who
are purchasing fuel. It is clearly relevant in terms of international
competitiveness but, on the other hand, it has to be taken in
the round with other issues around taxation. I think where fuel
taxes are essentially important is to think about the distinction
of different levels of fuel tax between different products. There
we have seen that there can be a significant influence on the
way one product may come to the fore because it has a preferential
level of duty. It has been helpful in getting unleaded petrol
much more extensively into the market than a decade ago. It has
been helpful with low sulphur diesel and it is helpful also with
LPG. There is a 35 pence a litre lower duty on LPG and that is
encouraging initiatives in cleaner fuel. The differential can
have an impact on customer buying patterns rather than perhaps
the absolute level.
(Mr Jones) We have seen that certainly last year with
the introduction of ULSD in the market with a three pence a litre
differential on the old derv diesel. We have seen almost complete
movement of this cleaner burning product into the market place.
4. Do I take it then that you are fairly dubious
about the environmental claims made by the Treasury as far as
the significance of taxes on consumption? Is that being over-simplistic
or does that ignore other aspects like the introduction of lean
burning cars and things like that? How significant in your experience
is, for example, the lean burn car, the technology of the vehicles
into which your fuel goes? Is that significant as well?
(Mr Polkey) Let me say a little bit about the underlying
environmental question you are asking. Certainly I agree with
what the other gentlemen said, that I think that the demand is
relatively inelastic so depending on the price moving up and down
it does not make that much difference to consumption. In terms
of the new technologies that have been brought in, everything
that we see and, indeed, the auto oil study found, says that from
an air quality point of view we will meet those standards by 2005.
So we are on track to meet that. I guess there are other policy
things that I have seen which have been stated that the fuel tax
is trying to do, things like reduce congestion, reduce the level
of accidents, etc.. I think those are questionable. I think the
fuel tax is a relatively blunt instrument to try and do that.
There are some better targeted things if you decide what your
policy is. It may be if you want to try and hit congestion or
something like that, road tolls congestion taxes are actually
a more targeted approach. If you want to impact vehicles, it may
be that vehicle excise duty is a better targeted approach to do
that. The key is to figure out what policy is behind these things.
I think the general environmental thing is a bit too wide ranging.
(Mr Brinded) It is on the environmental front that
the differential level has made the most impact in the past and
it is still doing.
5. You would say that your experience suggests
that blanket taxes, if I can put it that way, as distinct from
differential taxes are not as effective in securing the kind of
environmental objective of an overall reduction in demand?
(Mr Jones) I think that is difficult to say because
there are just too many factors to be taken into account. The
whole level of the economy, what is happening to the car parks,
I think there are a lot of factors that are affecting the current
level of fuel usage. Certainly we have seen a flattening of the
growth in transportation fuels but, again, that is perhaps partially
affected by the increase in taxation, it is partially affected
by the change of the car park and different fuels.
(Mr Mumford) I would totally agree with what has been
said. I think the key thing is the differential taxation because
the issue is, is there a choice? If there is an alternative that
can be switched to then sometimes a very small differential is
enough to encourage that shift. If there is no alternative, or
if the alternative is one which maybe will take ten or 20 years
to bring in, then you are not going to see that impact very quickly.
I think that we see the impact of investment, particularly the
investment in new technology and new plant and new engines, that
is the area where the real benefit comes.
6. If the overall price of petrol has very little
impact upon demand, does it thus follow that you individually
and collectively are pretty indifferent as to the actual overall
petrol price level? If that follows, does it mean that you have
or have not made representations to the Chancellor as to what
duty on petrol should be? After all, there are millions of your
customers out there who for every pound they spend on petrol 86
pence of that is going to the Exchequer. Do you see it as any
part of your role as they being your customers to make representations
to the Chancellor about the overall level of petrol duty or are
you simply indifferent to that and saying "Whatever level
of duty is placed upon us we will pass it on to the customer and
that is a matter as between them and the Government, them as taxpayers
and the Government as the government. It is an electoral matter"?
Do you make representations to the Chancellor in the run-up to
the Budget or do you just let him get on with it?
(Mr Jones) As far as I know we have not made representations
to the Chancellor on the overall level of taxation. Certainly
we have discussed some of the differential levels. We do see ourselves
as a very efficient tax collector.
7. It is a matter of indifference to you here
in the UK that UK motorists, your customers here, are paying substantially
more than motorists elsewhere in the European Union?
(Mr Mumford) I would not say it is a matter of indifference.
We see our role as trying to provide the cheapest fuel we can
for our customers. In the UK currently we have the cheapest fuel
in Europe before tax.
8. Before tax, yes, but clearly so far as your
customer is concerned he is not dancing round the forecourt saying
"Yippee, I have found the cheapest petrol before tax"
because actually what they are concerned about is the price at
the pump. Therefore, if you are trying to find your customers
the cheapest petrol surely you should be making representations
to the Chancellor, at least drawing to his attention the differential
between duty paid here and duty paid elsewhere within what, after
all, is supposed to be a single market elsewhere in the European
(Mr Mumford) Yes. I think that information is extremely
well documented. We do get a weekly price report of the before
and after duty petrol prices around Europe. We and our customers
are both acutely aware of this issue. The Treasury is also acutely
aware. If it comes to the issue of advising on particular types
of fiscal measures, then I think we would feel we are not that
confident to comment on the effectiveness of certain things in
other people's industries.
9. Every other industry which is hit by tax,
I think the industry concerned makes jolly sure the Chancellor
understands the impact of that tax on their customers. It is not
surprising in part that we are starting to see direct action because
if customers feel that you, as the provider, are not standing
up to their interests, who is? Maybe one of the bits that is missing
in this equation is your indifference to the amount of duty which
is put on petrol so clearly the Treasury feels they can continue
to escalate the petrol duty without anyone making any complaint
in the industry whatsoever.
(Mr Brinded) I do not think that we would necessarily
be the most influential voice with the Treasury anyway, to take
your last point. I think the point is that the impact on motorists
is represented by the motoring organisations like the AA. The
impact on business as a whole is best represented by the CBI.
I think that is where the representations are made and best made.
I think where we can focus is on talking about things like differential
levels of duty which will have an impact on particularly the environment
and clean up.
10. On the other hand, let us face it, you do
use petrol as businesses or diesel. You transport vast amounts.
One of the reasons probably why we are having this inquiry is
the events of September resulted in your people being unable to
get out of the refineries and into the depots.
(Mr Mumford) Yes.
11. You use this. You pay that, I presume.
(Mr Mumford) Yes.
12. I have not yet been able to establish that
you do not, so I presume you do.
(Mr Polkey) We do.
13. Are you relaxed about it because you make
so much money elsewhere that it is a mere bagatelle? It does not
matter. I am sure that is not what your shareholders believe.
(Mr Mumford) I would not say it does not matter but,
to get it in perspective, I think the duty that we pay in order
to deliver fuel amounts to about 0.1 pence per litre, in other
words that is the element of the transportation cost accounted
for by duty, it is there, it is a cost. It is not one of the biggest
14. Is it a more significant cost than the way
in which you have to pay duty between the forecourt and the refineries
in the sense of having to pay duty earlier than some of your competitors
in the retail business?
(Mr Mumford) It is a larger cost.
15. Which is a larger cost?
(Mr Mumford) The larger cost is the duty that we actually
16. The timing of the duty?
(Mr Mumford) Sorry, no, the duty on the fuel that
17. Right. You make more noise about when you
have to pay the duty usually than the fact that there is duty
on your transportation?
(Mr Codd) Nobody is suggesting that duty is going
to go down to zero.
(Mr Codd) Perhaps the significance of the point at
which we pay duty is potentially more significant to us than the
delta between what might be regarded as an optimum and minimum
level of fuel duty.
19. There have been a number of suggestions
mooted, as it were, regarding the Chancellor's pre Budget statement.
What would be the worst case scenario for you as a result of that
(Mr Brinded) I would just say the point has been made
in relation to the downstream industry in relation to fuel duties,
it is not something which has a huge impact. It is a cost, it
is a small cost to our business, it is not a differential cost
between us but it is a cost we all bear. In a sense, being a highly
competitive industry, we are much more conscious of things which
might differentiate between us. I think the concerns I would have
would be if whatever happens there is a recurrence of the sort
of blockages and protests and intimidation that we had outside
our terminals six weeks ago. I think that is the thing that we
would like to see not happen.