How long will low diesel prices last?

After years of struggling with among the highest fuel duty and overall diesel prices in Europe, the British transport industry is now coming to terms with low diesel costs – as forecourt prices in parts of the country fall below the psychological £1/litre mark. But some larger enterprises say the direct benefits are less than might be thought.

Although major players almost always had ‘open book’ contracts allowing costs to be passed on to customers, after years of absorbing increasing fuel prices most of the medium-to-large third-party hauliers have managed to negotiate contracts incorporating fuel price escalators, meaning the that fall in fuel prices will be of little direct benefit in many cases.

Eamonn McGurk is founder of Gloucester-based Keyway Group, which offers a wide range of services to the construction industry, runs a fleet of 50 tipper and skip trucks, and also operates low-loaders.

He too said there was little direct benefit to his business from reduced fuel costs as fuel price fluctuations were passed on to the customer, but Keyway was benefiting in more general terms from the increased confidence that cheap fuel was bringing to the wider economy. He emphasised that the increase in economic activity that the low diesel price had brought was good for UK plc, too.

“Falling fuel costs have made people generally more ambitious and adventurous, and that is generating more business for us,” he said.

“The reduced price of diesel and other fuels means that people are being given reasons to do things, rather than not.

“I believe the price of fuel is going to stay down. Worldwide, production is outscaling demand, and I can’t see that demand is going to catch up sufficiently in the foreseeable future to stop the price falling.

“For us, it’s freed money up by reducing costs for our customers. It gives people opportunities in much the same way that the 0.5 per cent bank rate does. It’s very good for the UK: it puts us on a par with the rest of the world.

“We are taking the opportunity to invest heavily in equipment. On the transport side, we took 30 new Scanias last year and I’ve just ordered 25 new Volvos for delivery this year.”

Bill Hockin, who is managing director of William C Hockin in Barnstaple, Devon, said the fall in fuel prices was very welcome.

“This is not before time. We’ve been struggling with high fuel prices since 2009, and in our general haulage operations it was very difficult for us to pass on increases in diesel costs to our customers.

“The fall in diesel prices means that we can afford to pay our drivers better and invest in the more expensive Euro 6 trucks.

“I wouldn’t say the current diesel prices are low: they are just where they should be at the moment. Our diesel bill is now manageable as a percentage of our turnover.”

William C Hockin has a dedicated fuel tanking business, and Mr Hockin has not noted any great increase in traffic for it since the oil price started to fall.

“It hasn’t really changed consumption overall,” he reports. “Volumes are running about the same. In fact, demand for kerosene is actually very low because of the mild winter.”

He emphasises that the falling diesel price will not save transport businesses that are badly run.

“It’s all about service now. Our customers no longer hold large stocks of goods or materials. Trucks have to arrive loaded with the required product when requested… and the only way an operator can do that is by recruiting and retaining good drivers and continuing to keep their fleets up to date.”

Downward pressure on fuel prices continues with the ending of economic sanctions against Iran. The re-entry of the former kingdom of Persia, which holds the world’s fourth largest reported reserves of oil, onto the world stage had an immediate effect, knocking the price of Brent crude down to $28 a barrel – the lowest since 2003.

Global crude oil prices have already fallen by 70 per cent since the middle of 2014, driven by factors ranging from a slowdown in the expansion of the Chinese economy, to attempts by legitimate producers to price pirate oil from ISIS out of the market.

Middle East oil producers’ organisation OPEC said it was working towards stabilising oil prices by the middle of the year, and HSBC chief executive Stuart Gulliver said he expected the price of oil to be between $25 and $40 a barrel by January 2017.

Currently global oil output is estimated as being between two and 2.5 million barrels a day ahead of demand.

However, UK operators may not benefit from these low prices for long. While fuel duty has been frozen for the last four years, substantial hints have been dropped that an additional 2p/litre will be charged on petrol in the April budget this year. With diesel being branded as an environmental pariah after the Volkswagen emissions scandal, it is likely that it will suffer an increase that is at least as large.