Something Topical and Typical for Summer

           Energy Markets

As the summer season gathers momentum, holiday makers around the world tend to take to the road. Loading up their cars with families, pets, and luggage, they head off in search of beautiful countryside and beaches to enjoy what they hope will be lovely weather. The typical example is in the US where the period is known as the driving season, starting with the Memorial Day weekend and usually running through the summer until the Labor Day holiday weekend early in September. During this period, the US will tend to import more oil products to its East Coast refineries, which in turn will put some additional pressure on the world petrol (gasoline) market.

The impact of the higher oil price is far-reaching on both retail and recreational markets. As the oil price fell last year, Costco, the retail giant, announced increased profits on the back of the lower oil price and subsequent gasoline price. Americans were taking advantage of the lower price, getting out more and spending more in Costco. Supply in Europe has in recent years been curtailed by demand from the US as European refiners have exported to the US during the driving season. However, today, now that America produces most of its own petrol, the import total has fallen dramatically. Yet, having said that, demand from the US for European product is still at such a level that it influences the availability of petrol and diesel in Europe, exerting further pressure on both price and supply.

With the price of oil, taking Brent crude for Europe, up by 50% already this year, European prices have risen significantly. Petrol prices in the UK are close to 30ppl with diesel some 10% higher at 33ppl and even higher in some other European countries. US residents are not the only ones to take to the road in the summer months, and for many such pricing will have a damaging effect on domestic holiday aspirations and the health of the tourist industry, too. For those wishing to fly away, there will also be an adjustment on airline fares as operators struggle to hedge fuel prices. For those that get it wrong, competing in the market becomes increasingly difficult and can lead to an early failure as margins are primarily linked to the rice paid for fuel.

As an aside, last week, a prominent journalist tweeted that his mother had called him from Spain asking him to tell his friends in OPEC to listen up and do something about the price of fuel. This reminded me that the former Secretary General of OPEC admitted that his daughter used to call him from Canada, asking him to do something about higher fuel prices! OPEC and their non-OPEC partners are aware, but will they listen and act accordingly or simply continue with their own self-centred policy and let the US suppliers cash in?

In Europe, countries pay significant levels of taxation on their fuel. For many, this is greater than 50%, while in the US, a figure of 17% is closer to the mark. Furthermore, VAT of 20% is taxed on the duty of 57.95ppl. So, for the European driver, the price paid for automotive fuels, whether petrol or diesel, will be far higher than that paid in the US and some Eastern European countries where consumers are given some level of support. There is little respite in sight in the short-term for many car users. Having been coerced into switching to diesel 15 years ago, many are now stuck with perfectly good diesel-driven vehicles that are not particularly environmentally unfriendly either. However, energy efficiency has hit the car market, too, whatever the fuel, and whereas cars would average 22-30 mpg 10 years ago, they are now achieving 50mpg+, certainly offsetting the impact of higher prices for now.

If OPEC does get its priorities more in tune with consumers this month, some modest respite could follow later on, but in the meantime, the solution is to drive less (not an option for many) or switch to a vehicle that offers greater economy although, perhaps, not so much fun.

John Hall

John joined Alfa Energy in 2013 as Chairman, where his specific interest is the development of the company’s profile in the areas in which it primarily operates - across the EU and the US. He is Fellow of the Energy Institute, a Member of the Parliamentary Group for Energy Studies, an Associate Member of the Chartered Institute of Purchasing and Supply, and a Member of the Market Research Society. He began his long career in the industry when he set up John Hall Associates in 1973, a company which merged with Energy Quote in 2009 and currently trades as Energy Quote JHA.