Low crude prices may trigger future hike in diesel costs

By Categories: NewsPublished On: Wednesday 3 June 2015

frontpage_mainWhile UK hauliers have been enjoying bulk diesel prices which have been as low as 89p/litre + VAT this year, oil industry experts have cautioned that the underlying reduction in crude prices from last year’s $115 a barrel to an extraordinary seasonal low of $45 a barrel in January is causing oil companies to slash investment, which could lead to supply problems and soaring prices in the medium-term future.

A study by Rystad Energy commissioned by the Financial Times showed that the rock-bottom crude prices had led to 26 major oil exploration/extraction projects in 13 countries being cancelled by major enterprises, including Royal Dutch Shell, BP, ConocoPhillips and Statoil.  Typically the projects axed have been those involving ‘difficult’ reserves such as the Canadian tar sands and American shale oil.

Leading analysts Goldman Sachs has also identified 61 postulated new projects that are uneconomic at an oil price of under $60 a barrel, putting a potential yield of 10.5 million barrels a day at risk.

Morgan Stanley Bank said it expected crude prices to rise to $85 a barrel for Brent crude by 2017.

British hauliers would be particularly vulnerable to any future global shortage of diesel. The UK’s imports of petroleum products more than tripled last year, according to Reuters, in spite of total domestic demand growing by less than one per cent.

Last year saw the permanent closure of Murphy Oil’s refinery in Milford Haven, the mothballing of one of Essar’s crude distillation units at Stanlow, and announced cuts of 50 per cent capacity at Total’s Lindsey refinery by the end of next year. It was also the first year since 1984 that Britain had been a net importer of petroleum products.

The refining trade group UKPIA said that the UK had a net deficit of nearly 50 per cent on diesel (the International Energy Agency states that anything over 45 per cent constitutes a high risk) and Petrol Retailers Association chairman Brian Madderson expressed: “serious concerns about our road fuels energy resilience.”

Andrew Gardner, commercial manager of the PetroIneos Grangemouth refinery in Scotland, told a parliamentary hearing back in 2013 that relying on imports creates “resilience problems” that risk: “a third-party nation at some point potentially dictating what price they are going to give the UK fuel at.”

He has subsequently stated that: “As UK refinery capacity declines and imports slowly get harder to source, then the risk of UK supply disruptions will increase.”

At the end of January, Greenergy’s chief executive Andrew Owens said if more refineries closed, there could be immediate problems.

He said: “Existing terminals (in high-demand areas) are at the limit.”

Greenergy has worked in conjunction with Shell and storage firm Vopak to convert the closed Coryton refinery outside London into an import and storage hub for the south-east, but rising land values appear to have stopped the project.

Typically, North Sea crude oil yields 37 per cent petrol, 25 per cent diesel, 20 per cent kerosene, 12 per cent heavy oil/tar and three per cent liquid propane gas.

Meanwhile, the UK transport industry continues to focus its attentions on that element of diesel prices over which it can realistically exert a degree of influence – fuel duty.

The Conservative-led coalition presided over the longest fuel duty freeze in 20 years, but the party made no manifesto promise that this would continue after the election.

Voices within transport are beginning to express concern that a future duty rise could be deployed as one means of helping to meet deficit reduction targets, in the context of further planned spending cuts across government.

Road Haulage Association chief executive Richard Burnett has already urged the new government not to increase fuel duty in this parliament, calling it: “a heavy tax on business [which] pushes up the price of everything we buy, undermines competitiveness and holds back our haulage industry.”

The Freight Transport Association has also issued a warning to members that the chancellor George Osborne could announce fuel duty rises in his second Budget statement of the year, which is due to take place on 8 July.

James Hookham, FTA deputy chief executive, said: ““During the election campaign, the political parties ruled out increases in just about every other tax except fuel duty. We know there will be no rise in income tax, national insurance or VAT. That leaves fuel duty looking vulnerable to future increases but that would be a huge mistake for the Chancellor to make at this stage in the economic cycle.”

Saying that the government “must not raid road users to fund its election promises,” he added that the recent drop in crude oil prices had only had a limited impact on UK fuel prices.

“That’s because over 60 per cent of the bulk diesel price is fuel duty and the UK has had to pay more for its oil as the pound has weakened against the dollar since last summer,” he said.

“The reality is that a 40 per cent drop in crude oil prices has only resulted in an 11 per cent decrease in bulk diesel prices paid by a majority of truck fleets and even lower reductions at the forecourt as retailers have sought to increase their margins. The Chancellor needs to understand that fuel duty is still off-limits as he considers his Budget statement in July.”

FTA said it was renewing its call for a 3p per litre fuel duty cut, as championed by the FairFuelUK campaign that it co-founded with the RHA. It said the policy would: “put an extra £360 million into thousands of businesses that rely on commercial vehicles.”