Select Committee on Trade and Industry Fifth Report


III. IMPACT OF UK FUEL TAXATION

Farming

RED DIESEL

43. Farming is heavily reliant on transport. Mr David Hanley of Farmers for Action outlined the impact the price of fuel has on farmers: "living in a rural area we certainly rely on fuel for every movement we make, every product which comes onto my farm and goes off is moved by the haulage industry".[140] Mr Brynle Williams told us "fuel is the sustenance of life to me".[141] Farmers use a diesel that is dyed and chemically marked. This so-called 'red diesel' is used to power agricultural machinery such as tractors, grain dryers, generators, and combines. It is illegal to use red diesel in, for example, vehicles used to transport livestock or produce to market.[142] During the fuel crisis, however, farmers were given an exemption to use red diesel in any vehicle.

  44. Duty is levied on red diesel at a much lower rate than on ordinary diesel: around 3.13p per litre compared to around 49p per litre.[143] The basic cost of red diesel has more than doubled over the last 15 months as a result of increases in crude oil prices. Mr Ben Gill of the NFU told us that in mid July he was paying a net price of around14p per litre; by September this had risen to around 22p.[144] The T&G were of the opinion that the low duty paid on red diesel means farmers "are not penalised by high taxes on fuel". They go on to say farmers' problems "would appear to be more to do with a drop in income than the price of diesel".[145] Given the low rate of duty on agricultural diesel, the Energy Savings Trust do not believe changes to fuel taxes can play any significant role in addressing the competitiveness problem of UK agriculture.[146]

BULK BUYING

45. Mr Gill of the NFU told us that "that the derv we buy in bulk exceeds significantly the price we can buy at the filling stations, particularly of the price setters, which are the retailers".[147] In supplementary evidence, the NFU provided examples of differentials of between 4p and 6p per litre.[148] This included examples of fuel ordered by 'machinery rings': buying groups for between fifty and two hundred farmers. This is also a problem for UK hauliers who may purchase their fuel in a number of ways:

    —  on a fuel card from one of the major fuel brands;

    —  through bulk storage on their own premises;

    —  through local accounts with filling stations;

    —  or through a bunkering system whereby they pay for fuel and draw from it when required.[149]

The T&G expressed concern about the fact that hauliers were "turning their backs on bunkered fuel suppliers because local forecourts were offering cheaper diesel".[150] In oral evidence, Mr Jimmy Elsby told us "I find it amazing for example that you can go to a pump and pay lower than you can when you buy in bulk".[151]

46. The Office of Fair Trading (OFT) has recently concluded an inquiry into wholesale petrol. Independent retailers had complained that oil companies had been selling wholesale fuel to them at prices that were higher than the pump prices at the oil companies own branded and tied forecourts. The OFT found no evidence of price fixing or abuse of dominant position.[152] The Financial Secretary told us that the companies and organisations represented at the Road Haulage Forum were concerned at one point about the differential: "I think the problem has eased now or may not even apply at all, but at one stage it certainly was a worry to them".[153] Supplementary evidence provided by the Government states that the retail margins for diesel have generally recovered from the levels of October and November 2000 and this makes it "unlikely that bulk sales to farmers and hauliers are still being priced above retail levels".[154] They go on to say that the OFT has continued to monitor the wholesale and retail markets and agrees with this judgement. Whilst we appreciate that bulk buyers may agree in advance the price of fuel they will purchase and prices may subsequently fall, it seems bizarre that such wholesale arrangements should ultimately penalise bulk buyers. We recommend that, following the Office of Fair Trading's inquiry into wholesale petrol, they should continue to monitor the situation, to examine the source of discrepancies between pump prices and bulk prices for diesel, and identify remedies.

IMPACT OF FUEL PRICES

47. For farmers, the increase in fuel prices has to be seen against a wider backdrop. For some years now, farming incomes have been in decline. Mr Gill of the NFU quoted figures for arable farmers of a collapse of 90% in income over the last three years and a predicted average loss for next year of £4,000.[155] Mr Hanley of Farmers for Action told us that his personal income had dropped by about fifty per cent in the last three years.[156] Mr Gill described the "the level of despondency, despair, frustration, isolation, anger, the feeling of lack of understanding of farmers and food producers".[157] Mr Hanley talked of the suicide rates amongst farmers.[158] The rising fuel prices were seen as putting additional pressure on a sector already facing severe problems. Farming has been in crisis for some time. Any additional costs, whether from fuel prices or from elsewhere, inevitably have a disproportionate impact. It is difficult to draw a clear distinction between the problems facing the industry as a whole and the impact fuel prices are having on farmers' ability to compete in the European marketplace. The high proportionate increase in the price of red diesel arose, not a result of motor fuel taxation rates, but increases in the price of crude oil.

Retail

48. The retail industry is heavily dependent on road transport. Retailers are either major operators of commercial vehicle fleets or contract out these operations to third parties. The British Retail Consortium (BRC) stated "it is extremely difficult to isolate the direct impact on motor fuel taxation on the competitiveness of UK retailing as so many cost factors and operating criteria need to be taken into account".[159] They cited one example of a major retail company that faced an additional £1m cost resulting from the increase in fuel duty announced in the March 1999 budget.[160] They went on to say that, for most of their member companies, transport and distribution costs are normally in the top five, or even the top two, costs.[161] Ms Bridget Rosewell of the BRC noted that when all the constraints on retailers are taken into account—when you can deliver, what you need to deliver, perishability—the additional cost of rising fuel prices has to be "taken on the nose".[162] Mr Michael Roberts of the CBI gave the example of retailers facing upward pressure on their transport costs.[163] Transport costs are obviously an important element of overall costs for retailers. However, we have received no evidence to suggest that UK retailers are rendered less competitive because of the levels of UK motor fuel taxation.

Bus and Coach

49. Bus and coach operators pay fuel duty of over £300 million per annum, even with the Fuel Duty Rebate (FDR). The FDR effectively reduces the amount of fuel duty paid by bus operators by 75%.[164] The Confederation of Passenger Transport (CPT) thought that "the increase in diesel costs has been a key factor behind the increase in bus fares during the decade".[165] Diesel prices for coach operators have increased by 17p per litre since February 1999. These price increases have put the coach industry "under severe financial pressure". The CPT quote ONS statistics showing that coach hire charges increased by only 6% during the year to the first quarter of 2000. The CPT interpret this as the industry being unable to pass on the extra diesel cost to customers, even though fuel accounts for over 20% of total operating costs.[166]

50. The CPT have estimated that about 5% of coach operators have ceased trading—about 350 companies—over the last year. This was not entirely due to the cost of fuel but "fuel cost is an important component".[167] Mr Steve Clayton told us in oral evidence that for a bus company fuel costs were around 10-15% of total costs; for a coach company it is closer to 20%.[168] There is competition between UK and other European coach operators only at the margin. Only about 1% of other European coach operators have come into the UK and about 10% of bus operators.[169] Mrs Veronica Palmer of the CPT told us "although our fuel prices are higher there are other costs that European operators have to bear that ours do not." In her opinion, "it is a fair balance taken overall".[170] Although high fuel taxation impacts on the bus and coach fares paid by consumers, and may make passenger and road transport less competitive with other means of transport, fuel taxation levels do not appear to have adversely effected the international competitiveness of the UK bus and coach industry.

Oil Companies

GENERAL

51. The oil companies were largely of the opinion that levels of motor fuel taxation do not directly effect their comparative position. BP told us "there is no evidence that our overall level of sales is affected by the amount of duty imposed".[171] Mr Codd, Managing Director of Texaco Ltd told us that, in terms of the impact fuel duty has on competitiveness downstream, it is "relatively modest and not at all comparable to the impact that rises and falls in crude oil prices have".[172] Equally, the oil companies do not appear to suffer greatly by UK hauliers purchasing their fuel outside the UK. Mr Codd told us Texaco were not "globally indifferent"; as they have no filling stations in France, they are net losers if UK hauliers fill up there. However, he also remarked that any such effect would be difficult to measure.[173]

ELASTICITY OF DEMAND

52. The consensus of opinion among the five big oil producing and refining companies is that demand for motor fuel is relatively inelastic. Shell's view was that "there is clear evidence that in the medium term overall demand nationally is not significantly affected by fuel taxation and prices at current levels".[174] They went on to say that even though the tax applied to pump prices has risen substantially over the past few years, there has been little or no change in fuel demand in the UK.[175] BP shared that view, noting that, with some exceptions such as the location of duty points,[176] the levels of taxation do not appear to have much effect on the total quantity of fuel purchased.[177] The RHA believed that the price of fuel within the haulage sector "does not affect the number or length of journeys made, nor the location of businesses relative to their markets".[178] The AA and United Kingdom Petroleum Industry Association (UKIPA) published a report that concluded that "raising fuel prices has a modest effect on fuel consumption and even less on traffic growth".[179] The report stated that the short term effects on fuel consumption are small with a 10% increase leading to a 3% fall in consumption.[180] In a recently published article, David Begg, Chair of the Commission for Integrated Transport quoted research that suggested there has been a decline in traffic growth.[181] If one intention behind high fuel taxation is to reduce the amount of petrol sold, the evidence available to us is ambiguous as to whether it is working.

THE POINT AT WHICH DUTY IS LEVIED

53. Since the mid 1980s, duty on motor fuel in the UK has been levied when the fuel leaves the refinery gate, as opposed to the terminal. BP told us the original purpose for the change was to reduce the administrative costs incurred by HM Customs & Excise but "it is questionable whether this is any longer valid".[182] In their opinion, the current arrangements place the UK downstream industry at a competitive disadvantage compared to the rest of the EU because all the fuel held at UK terminals is duty paid. Elsewhere, duty is paid when the fuel is loaded into the tanker or as it leaves the terminal. The UK system has the effect of discouraging stockholding in UK terminals and maximising stockholding in refineries.[183] Total Fina Elf pointed out that the difference in duty collection point impacts on the final cost of product because:

    —  payment in the UK is made up to 15 days before that in the rest of Europe;

    —  any physical hydrocarbon losses during transit and terminally are also duty paid;

    —  the UK duty point applies only to motor fuels refined in the UK so imported motor fuels can be brought directly into some product terminals 'under bond' with the duty deferred until the product leaves the terminal.[184]

54. It has also been suggested by the T&G that as a consequence of the duty point, many retailers have reduced the amount of petrol and diesel they store as a cost saving measure.[185] The retailer has to buy the fuel from the oil company duty paid. Mr Nick Brocklehurst of the Petrol Retailers Association told us that if the point at which duty was levied was changed "it would be of great assistance. It is typical for the retailer to get little or no credit at all from the oil company whether for duty or for the product".[186] We raised the issue during our oral evidence session with the Financial Secretary and the Minster for Energy. The Financial Secretary said "I would not want to encourage the Committee to believe that we are seriously looking at changes in this area, because we are not".[187] He went on to assert that the current system is "very, very efficient". He later remarked that it might well be the case that the tax point affected the level of stock held but "the only problem I am aware of with that was in the period of fuel disruption, which, hopefully we are not going to be having again".[188] We note that VAT is paid at the point of sale, and collected thereafter. There are a number of concerns over the point at which duty is levied. Not only does the current point of duty appear to have effects on the competitiveness of oil companies, but the low levels of fuel held by retailers were a factor in accelerating the September fuel crisis. We are not convinced that the Government has given sufficient consideration to changing the current arrangements. What is efficient for the Government is not necessarily in the best interests of industry or consumers. We recommend that the Chancellor commit the Government to an open review of current arrangements for the point at which duty is levied on fuel.

Petrol Retail Industry

55. There are approximately 12,500 service stations in the UK.[189] Some are independent petrol retailers: others may be branded by the oil company. For example, Shell has 1,107 retail sites of which over 700 are company owned; the rest are owned and operated by independent dealers but display the Shell logo.[190] The Petrol Retailers Association (PRA) thought that high taxes on motor fuels had been a contributory factor in the closure of petrol forecourts in the UK, said by them to be closing at a rate of "around 1,000 per year".[191] Unfortunately, despite repeated requests, the PRA did not supply us with a list of forecourts that have closed. We had been told that an earlier list of alleged closures had been found to include sites closed many years ago or sites still open. Petrol retailers are having difficulties of various sorts, with very low margins, competition from supermarkets, and disagreements with the big oil companies. In Northern Ireland, their plight is exacerbated by cross-border purchases. Independent petrol retailers are facing problems over the pricing of their purchases from oil companies. The fuel crisis made life uncomfortable and more problematic. But taxation itself is not the real problem, so long as demand for fuel remains relatively inelastic.

Rail Freight

56. The Government is committed to an increase in rail freight's share of the freight market. The Department of the Environment, Transport and the Regions ten year transport plan published in July 2000 set a target of an 80% increase in rail freight by 2010.[192] Rail freight is said to be growing at around 9% in volume a year, 40% since rail privatisation. Figures supplied by the CBI show that rail now accounts for 10.5% of all freight moved by land in the UK.[193] The Railway Development Society point out that much road haulage, particularly in the bulk sectors, is in direct competition with rail, pipelines and coastal shipping. They go on to say that "cheaper fuel would enable lorries to undercut rail/water/pipeline transport and undermine attempts to diversify into other modes".[194] The Rail Freight Group believe that, unless there are mitigating measures, any fuel duty reduction would not only make it more difficult for rail freight to compete but would "put at risk the 80% growth over 10 years as well as the Kyoto targets".[195] The RHA remarked that the road haulage industry is not opposed to the increased use of freight and many hauliers make use of rail where it makes sense for them to do so. They point out, however, that the majority of journeys, even where part of the journey is made by rail, begin and end by road.[196]



140  Q293 Back

141  Ev not printed Back

142  Ev, p84 Back

143  ibid Back

144  Q337 (Net of customs duty, fuel duty, VAT) Back

145  Ev, p93 Back

146  Ev, p148 Back

147  Q334 Back

148  Supplementary evidence, not printed Back

149  Q215 Back

150  Ev, p92, para 4.1 Back

151  Q381 Back

152  OFT concludes inquiry into wholesale petrol, PN 47/00, 21 November 2000 Back

153  Q464 Back

154  Ev, p162 Back

155  Q339 Back

156  Q292 Back

157  Q361 Back

158  Q325 Back

159  Ev, p32 Back

160  ibid Back

161  Q117 Back

162  ibid Back

163  Q91 Back

164  Ev, p108. Operators of coach services do not receive FDR and pay the full rate of duty. Back

165  Ev, pp 110-11 Back

166  Ev, p111 Back

167  Q398 Back

168  Q405 Back

169  Q408 Back

170  ibid Back

171  Ev, p2 Back

172  Q2 Back

173  Q78 Back

174  Ev, p4, para 4.7 Back

175  Ev,p5, para 6.4 Back

176  See paragraph 53 Back

177  Ev, p1, para 2 Back

178  Ev, p3 Back

179  The effect of fuel prices on motorists, Stephen Glaister and Dan Graham, Commissioned by the AA Motoring Policy Unit and the UK Petroleum Industry Association (UKPIA), p1 Back

180  ibid, p16 Back

181  The Guardian, 06/03/01 Back

182  Ev, p1, para 8 Back

183  Ev, p2, para 8 Back

184  Ev, p9 Back

185  Ev, p92 Back

186  Q221 Back

187  Q493 Back

188  Q496 Back

189  Ev, p55 Back

190  Ev, p3, para 2.1 Back

191  Ev, p57, para 8 (The PRA represent petrol retailers who are independent of their motor fuels supplier) Back

192  Transport 2010 - The Ten Year Plan, p100 Back

193  Figures supplied by CBI, not printed. Back

194  Ev, pp 157-8 Back

195  Ev, p144, para 2 Back

196  Ev, p38, para 3.2 Back


 
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