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OFT report points to competition working well in UK road fuel sector

Rises in pump prices for petrol and diesel over the last 10 years have been caused largely by higher crude oil prices and increases in tax and duty and not a lack of competition, an OFT report has found.

The evidence gathered by the OFT suggests that at national level competition is working well in the UK road fuel sector, although it has identified an absence of pricing information on motorways as a concern and does not rule out taking action in some local markets if there is persuasive evidence of anti-competitive behaviour.

Drivers are not being ripped off according to the OFT

The OFT launched a call for information on the UK road fuel sector in September last year to determine whether there are competition problems that need to be addressed. In addition to assessing the information submitted to it, the OFT has undertaken detailed analysis of pricing data to investigate claims that the £47bn market is not working well.

The OFT found that, pre-tax, the UK has some of the cheapest road fuel prices in Europe. In the 10 years between 2003 and 2012 pump prices increased from 76 pence per litre (ppl) to 136ppl for petrol, and from 78ppl to 142ppl for diesel, caused largely by an increase of nearly 24ppl in tax and duty and 33ppl in the cost of crude oil.

A key feature of the road fuels sector over the past decade has been the growing influence of the big four supermarkets. They increased their share of road fuel sold in the UK from 29 per cent in 2004 to 39 per cent in 2012. The supermarkets’ high throughput per forecourt and greater buying power has allowed them to sell fuel more cheaply than other competitors. In August 2012, for example, the average price of petrol at supermarkets was 2ppl cheaper than the average at oil company owned sites and 4.3ppl cheaper than the average charged by independent dealers.

The OFT recognises that many independent dealers have found it difficult to compete in this sector, with a significant number exiting the market. Overall, the number of UK forecourts has fallen from 10,867 in 2004 to 8,677 in 2012, although the rate of decline appears to have slowed in the last three years. In the majority of areas where forecourts closed between November 2011 and August 2012 retail competition still appears to be strong.

The OFT examined a number of specific concerns that had been raised about the road fuel sector. For example, they did find a variation in petrol prices of around 1.9ppl between rural and urban areas, with rural areas being more expensive. This was due to a number of factors including lower throughputs per forecourt, fewer competitors within a local area, and higher transport costs for getting fuel to rural forecourts.

The OFT also noted that it had failed to find evidence of anti-competitive practices being used against independent dealers by supermarkets and major oil companies but will continue to consider any credible evidence it receives.

And finally, the OFT failed to find evidence that pump prices rise quickly when the wholesale price goes up but fall more slowly when it drops.

Clive Maxwell, OFT Chief Executive, said: “We recognise that there has been widespread mistrust in how this market is operating. However, our analysis suggests that competition is working well, and rises in pump prices over the past decade or so have largely been down to increases in tax and the cost of crude oil.

Our call for information has not identified any evidence of anti-competitive behaviour in the fuel market at a national level, where competition appears to be strong. There may be some issues at a local level. Where we receive evidence of potential anti-competitive behaviour we will consider taking action.”

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Posted in Office of Fair Trading, Oil

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