When crude oil prices go up, the prices of petrol and diesel go up pretty well straight away and by the full amount, or more, of the crude price rise. When crude prices go down, however, road fuel prices are often slow to fall; and when they do, the fall is less than the full fall in crude prices.
Click on charts below for a larger version. Click here for a PowerPoint of the left-hand chart.
In response to complaints of motorists and haulage companies, the Office of Fair Trading has announced that it will investigate the link between crude prices and prices at the pump. It will report in January 2013.
The review will consider questions of competition and market power. In particular, it will look at the power of the oil companies in determining the wholesale price of road fuel.
It will also examine the retail fuel sector and whether supermarkets are driving out independent retailers. The claim of many independent petrol stations is that supermarkets are selling below cost as a lost leader to encourage people to shop in their stores. They also claim that supermarkets use their buying power to obtain fuel more cheaply.
What is more, most of the petrol stations that are not part of supermarkets are owned by the oil companies. Again, independents claim that oil companies supply fuel more cheaply to their own stations than to independents.
As a result of what many independents see as unfair competition, many are driven out of business. Today there some 9000 petrol stations in the UK; 20 years ago there were twice as many.
The following articles look at the remit of the OFT investigation and at the competition issues in the road fuel market.
Articles
Formal inquiry tries to ease motorist pain at the pumps ITV News, Laura Kuenssberg (5/9/12)
OFT to scrutinise retail petrol market Financial Times, Caroline Binham (5/9/12)
OFT launches probe into pump prices Channel 4 News (5/9/12)
Petrol and diesel prices: Office of Fair Trading launches competition inquiry Guardian, Terry Macalister (5/9/12)
Petrol and diesel price review is launched by OFT BBC News (5/9/12)
Are supermarkets to blame for the devastation of independent petrol retailers by deliberately selling at a loss? This is Money, Tom Mcghie and Neil Craven (8/9/12)
OFT petrol pricing probe welcomed The Grocer, Beth Phillips (7/9/12)
Private businesses welcome OFT’s fuel price investigation Talking Retail (6/9/12)
10 charges that make consumers scratch their heads BBC News Magazine, Lucy Townsend (6/9/12)
Data
Crude Oil Price Index Index Mundi
Daily Brent Crude Spot Price, 1987 to present day US Energy Information Administration
Current UK Petrol Pump Prices What Pric£?
Fuel Prices WhatGas.com
Questions
- Describe the structure of the road fuel market, from oil production through to the retailing of petrol and diesel.
- What is meant by the terms ‘monosony’ and ‘oligopsony’? Which companies in the road fuel market have significant monopsony/oligopsony power?
- What determines the price elasticity of demand for road fuel in (a) the short run; (b) the long run? What implications does this have for the value of the short-run and long-run price elasticities?
- Where is the abuse of market power likely to occour in the road fuel market?
- To what extent is it in the consumers’ interests for supermarkets to sell road fuel below average cost?
- Examine the data for pump prices and crude oil prices and establish whether there is any truth in the claim that pump prices adjust rapidly to a rise in crude prices and slowly to a fall in crude prices.
Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.
It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”
So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.
Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)
Questions
- For what reasons are many dairy farmers now making a loss?
- For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
- How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
- Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
- What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
- “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.
Reading the first article linked to below, you may be forgiven for thinking that farming has moved into the realms of science fiction. Dairy farming has moved determinedly into the era of technology and now benefits from extensive economies of scale with much higher productivity levels than even a decade ago. Yet 3000 dairy farmers are planning to leave the industry in the next two years and even the largest farms are struggling to make money. The processing sector has become significantly more concentrated and margins are being squeezed ever further by the power of the supermarkets, so has the market become unbalanced with too much power in the hands of supermarkets and processors?
Rising prices, failing farms. The strange story of milk Guardian (24/4/07)
Why British dairy farming is in crisis Guardian (24/5/07)
Questions
| 1. |
Describe the market structure of the milk industry. |
| 2. |
Discuss the extent to which this market structure has changed the level of prices in the market for milk in recent years. |
| 3. |
Evaluate possible measures that governments could implement to make the market for milk more competitive. |
When crude oil prices go up, the prices of petrol and diesel go up pretty well straight away and by the full amount, or more, of the crude price rise. When crude prices go down, however, road fuel prices are often slow to fall; and when they do, the fall is less than the full fall in crude prices.