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EDITIONS
Monday, 4 June, 2001, 10:42 GMT 11:42 UK
Q&A: What now for petrol prices?
Fears are growing that UK petrol prices may rise sharply in the coming months. Iraq's threat to cease oil exports has sparked the latest alarm.

BBC News Online explains what's happening and why.

What effect does Iraq have on UK petrol prices at the pump?

The price of wholesale crude oil is likely to be pushed higher if supply from Iraq is not available in the international marketplace.

Iraq exports 2.2m barrels a day of oil - about 5% of the world's total. But its latest dispute with the UN over sanctions caused Iraq to say that it would cease production from Monday onwards.

Fears over the lack of supply from Iraq has already sent the oil price higher, with the benchmark Brent crude oil for July delivery rising 43 cents to $29.50 in early trade in London on Monday.

Crude oil prices are now at a four-month high. It is these sorts of rises that prompt UK retailers to raise prices at the pump.

Is there any way to prevent international crude oil prices rising?

There is plenty of oil available to supply the international marketplace.

Other oil exporting countries could chose to boost their production and make up the shortfall from Iraq.

Oil ministers from the Organisation of Petroleum Exporting Countries (Opec) will decide on Tuesday whether to raise production.

Some sources say that Saudi Arabia is willing to make up any lack of supply from Iraq.

But other sources say that Opec is more likely to maintain current levels of oil production in order to ensure that wholesale prices do not fall.

Any effect from Iraq's decision to halt exports would be cancelled if Opec does agree to raise production.

There is also some speculation that Iraq will not really carry out its threat.

So is Opec largely to blame for the UK's high petrol prices?

Crude oil is only one factor influencing the retail price of petrol. In the UK, the crude oil and the cost of refining it into petrol accounts for less than 20% of the final cost of a litre at the pump.

The remainder is mostly taken up by fuel duty and value added tax (VAT).

Last year, Esso claimed that a retailer makes only about five pence for each litre of unleaded sold for 84p, with 61p going straight to the government in taxes.

The retailer's 5p has to cover other expenses including transportation, storage and processing as well as credit card charges, which alone work out at more than 1p a litre, according to Esso.

Shell claims not to have made a profit selling petrol in the UK for three years.

And independent petrol retailer Save this year went into administration because of the difficulty of making a profit at the pump.

Does the motorist still have cause to complain about the oil companies?

Much of the anger of motorists is sparked by the huge profits made by the oil companies.

But the profits at the oil companies largely stem from the cost of crude oil rather than petrol prices.

Fuel retailing and wholesale oil production are run as two separate businesses and cross-subsidising is illegal.

This means that oil companies are not allowed to use the extra money made from the crude oil business to offset tight margins in fuel retailing.

It is logical that, when determining the price at the pump, fuel retailers will follow the changes in the international price of crude oil.

But critics say the oil firms have been quicker to push the petrol price higher than they have been to reduce it when crude oil prices fall.

What power does the government hold over controlling the price of petrol?

The government cannot directly force oil companies to lower pump prices.

If the government did want lower petrol prices, it is more likely to alter the fuel duty.

In the Spring budget, the Labour party froze duty on fuel and then lowered the tax on ultra-low sulphur petrol by 2p a litre.

If the Conservatives are elected, they have promised to reduce petrol duty by 6p a litre, costing a total of 2.2bn.

The government could also chose to increase taxes on oil production in the North Sea.

However, this is not thought to be under serious consideration.

It would risk driving investment away from the UK and damage the government's claim to be supportive of business.

What are the latest developments in the UK?

Pump prices are creeping gradually higher. BP started the ball rolling with a one penny a litre rise at the beginning of the month, and supermarkets and other oil companies have steadily been following suit.

The average pump price is now just a couple of pence lower than the 80p a litre mark that triggered the widespread fuel protests last autumn.

Some demonstrations by farmers and hauliers at refineries in Wales over the weekend failed to attract the necessary wider support, with most protests petering out.

But the protestors claim that they have raised the very real possibility of further fuel protests in the mind of both the UK population and the government.

What are the longer term prospects for crude oil and petrol prices?

Unless there is a radical change in government fuel duty policy, the strength of crude oil prices will continue to be the biggest factor affecting the price at the pump.

Analysts and oil producing countries agree that, in the long term, oil prices will move sharply lower as more supply comes onstream.

But the direction of crude oil is much harder to predict over the next two years or so.

Any recession in the US or notable slowdown in world economic growth would be likely to depress world demand and prices.

However, in the past three years, Opec has shown it is capable of pushing up prices by implementing deep cuts in oil output.

Barclays Capital predicts that the oil price will hold its $25-30 a barrel range, but Salomon Smith Barney predicts that it will average $24 a barrel this year and drop to $17 the year thereafter.

But there are many factors - including the risk of greater unrest in the Middle East - that make even the best of forecasts unreliable.

Analysis of the oil market, OPEC, and the alternatives

Key stories:

Analysis

Background
See also:

22 Sep 00 | Business
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