Memorandum submitted by Shell UK Oil Products
1.1 On 25 September, The Trade and Industry
Committee of the House of Commons announced it would be holding
an inquiry into the "Impact on Trade and Industry of Motor
Fuel Taxation". The supply of fuel is essential for business
and other sectors of society. The protests that occurred in the
UK in September 2000 regarding fuel taxation caused serious disruption
to the supply of fuel to a wide range of industrial sectors throughout
the UK. Shell welcomes this Inquiry and looks forward to contributing
to its findings through this submission and oral evidence.
2.1 Shell businesses in the UK are part
of the worldwide Royal Dutch/Shell Group of Companies. Shell UK
Oil Products Limited is one of three main business sectors in
the UK and is responsible for refining and marketing products
from crude oil, which includes processing into transportation
fuels for the commercial and retail markets. It operates one refinery
at Stanlow in Cheshire, has two Shell owned and operated distribution
terminals, with distribution facilities at 12 other non-Shell
operated terminals and has 1,107 retail sites, 709 of which are
company owned and 408 are owned and operated by independent dealers,
but which display the Shell logo.
2.2 There are nine major refineries in the
UK and 64 larger scale distribution terminals as well as several
major pipelines to distribute different products. We believe Shell
has about 12.5 per cent of the retail fuels market in the UK.
3.1 The September 2000 demonstrations at
fuel distribution terminals have brought to the fore concern amongst
some commercial consumers about the level of taxation of fuel
(duty and VAT) and the impact of such taxes on the competitiveness
of certain sectors of industry and the economy. The Confederation
of British Industry (CBI) and other industry bodies have made
clear that while they do not agree with the methods used to bring
this issue to the public's attention, concerns about fuel taxation
are widely shared in their memberships.
3.2 These concerns are not limited to the
UK, fuel tax protests have been widespread across Europe. The
position has been exacerbated by the recent increase in pre-tax
product prices, largely brought about by increases in crude oil
prices. This is particularly the case since crude prices have
moved in two years from a low level. It should be noted, however,
that the price of crude oil is now about half the level in real
dollar terms it was in the early 1980s. If the change in £/$
exchange rate over this period is considered, the real price of
oil is now even lower. (See Annex 1)
4.1 Over time we expect crude oil prices
to fall and the reductions to be reflected in lower fuel prices
paid by consumers. A high crude oil price is in nobody's long
term interest, a point which we have made clear publicly, including
to the investment community. Profits increase in the short term
for exploration and production businesses, and increased revenues
will flow to governments in oil producing countries, including
the UK, but a high price causes resentment and hardship for customers.
4.2 Crude prices are difficult to forecast
as the market is volatile, they are set by supply and demand and
are influenced by things like weather and stock levels. Market
sentiment also plays a strong part, just as it does in stock markets
and currency markets. OPEC is currently trying to bring prices
down to the US$22-28 per barrel level but without causing a collapse
in the price, which is proving difficult. We expect the crude
oil price to remain above US$20 for the rest of 2000, but the
long term price to be lower than that.
4.3 High crude prices do not help OPEC in
the medium term as such prices encourage alternate supplies of
oil from non-OPEC countries such as the UK. (For example, Shell
has just announced an increase in capital investment in the UK
sector of the North Sea by 50 per cent to $1.2 billion in 2001.
Our total upstream investment in the UK supports over 60,000 jobs.)
But higher crude prices also slow countries' economies by increasing
inflation, and that depresses the market for OPEC's exports.
4.4 Government must take a view on fuel
taxation, both in absolute terms and as a proportion of product
prices. This will reflect overall priorities, including environmental
concerns, behavioural objectives, and aspirations on public expenditure
and the total burden of taxation. It must take this view on transport
and energy taxation, mindful of the volatility of crude pricesthe
price could fall sharply tomorrow, just as it has recently sharply
4.5 Shell does not universally gain from
higher crude and product prices, despite a perception to the contrary.
Around 64 per cent of the products sold by Shell worldwide is
bought by Shell on open markets at the prevailing market prices.
We supply to end consumers far more product than we produce ourselves.
We therefore supplement our own production with purchases from
other producers of crude oil and refined products. It is only
for the 36 per cent of product which we sell and which we produce
ourselves where we benefit from the crude prices prevailing at
that time. For the majority of our sales at retail sites and to
commercial customers, we are ourselves buying at higher prices
in the first instance. (See Annex 2)
4.6 Suggestions have been made that oil
companies sympathise with the aim of reducing fuel duties, whether
or not they sympathise with the methods recently employed. We
join the Government, Police, Trade Unions and others in unequivocally
condemning violence and intimidation of the sort used by some
protestors which jeopardises the safety of staff, contractors
and the general public and we are profoundly disappointed that
such concerns are discounted in some quarters.
4.7 Furthermore, we have no special interest
in lower fuel taxes for our own benefit. There is clear evidence
that in the medium term overall demand nationally is not significantly
affected by fuel taxation and prices at current levels. If fuel
taxes fall, petrol prices would fall in days, otherwise our share
of the market would evaporate quickly because of the intense competition.
4.8 We do recognise, however, that for the
socially excluded and certain sectors of industry fuel prices
are of course a major concern. We have taken steps to test means
of addressing these issues. In the Highlands and Islands of Scotland,
in conjunction with our local partners Gleaner Oil Ltd, we are
"fast tracking" the introduction of a full distribution
network for LPG (Liquid Petroleum Gas) which retails at around
half the price of petrol or diesel, having far lower duty levels.
This part of a planned national roll out of 200 sites by the end
4.9 We therefore take an interest in differential
rates of duty applied to different grades and types of fuel, because
these differentials can, and do, impact consumer demand for particular
products. These differentials have consequences not only for marketing
but also for production operations which need to be adjusted for
changing product demand.
5. WHAT LEADS
5.1 To assess the impact of motor fuel taxation
on the competitiveness of trade and industry, it is necessary
to understand the way in which the various markets work which,
together with taxes and duty, result in final prices to consumers.
5.2 The sale of motor fuel to consumers
and commercial customers represents the end of a supply chain
which has many stages and facets. There are over 3,500 oil companies
in the world which trade on four separate and highly competitive
markets: crude oil, refining, shipping and marketing. Each of
these four markets has distinct competitors, although Shell is
one of the few companies which invests and operates in each.
5.3 For a company such as Shell, there are
three main stages in getting fuel to customers. It starts with
the exploration and production of crude oil. This crude oil is
then refined into various products such as petrol or diesel (amongst
others). Finally, products are distributed and marketed to customers.
(See Annex 3)
5.4 Fuel prices are determined by a number
5.4.1 Exploration and Production of Crude
The crude market is subject to world wide political
and economic pressures as well as the market dynamics of supply
and demand. The Organisation of Petroleum Exporting Countries
(OPEC) has a key influence on the world supply of crude oil. The
UK is not a member of OPEC.
5.4.1a OPEC countries have over 75 per cent
of the world's proven oil reserves and currently account for around
40 per cent of the world's crude oil production. 65 per cent of
the world's oil reserves are situated in the Middle East.
5.4.1b Non-OPEC countries with proven reserves
include the US (2.9 per cent), the former Soviet Union (5.5 per
cent) and the UK at only 0.4 per cent. The US accounts for 25
per cent of global oil consumption, while the former Soviet Union
and the UK consume 6.7 per cent and 2.5 per cent respectively.
5.4.1c The investments and technological
advances made by oil companies around the world have kept world
reserves in line with, and in recent years ahead of, world consumption.
5.4.1d Together, the major private oil companies
are only responsible for producing just over 10 per cent of the
world's oil. (See Annex 2)
5.4.2a Once crude oil has been refined into
various products, such as petrol and diesel, these products are
then traded all over the world on separate secondary markets,
known as the Refined Product Markets.
5.4.2b These markets determine the daily
price, known as the spot price, which oil companies and others
pay for products to sell to end users. In other words, the price
which refiners charge independent wholesalers or their own retail
operations (where they operate in both markets). In Europe, an
organisation called "Platts" tracks market transactions
on a daily basis and reports on the prices being achieved in the
5.4.2c While product prices (excluding taxes
and duties) track crude prices over the medium term, they are
also influenced by stock levels, market sentiment and refinery
capabilities. For example, diesel prices usually go up in the
Northern Hemisphere in winter months due to higher demand, mainly
for heating oil. This is why a drop in crude prices does not necessarily
mean an automatic drop in prices to customers and vice versa.
5.4.2d Like crude oil, refined products
are priced in US Dollars so businesses buying and selling products
are also affected by the US Dollar exchange rate.
5.4.3 Marketing and Distribution
5.4.3a The extent to which products are
marketed and the complexity and efficiency of the distribution
network has an impact on the price to customers.
5.5 The price of fuel to consumers is not
only determined by the costs involved in the three stages just
outlined, but also by the level of taxation.
6.1 In many countries around the world taxes
exceed 50 per cent of the pump price and across Europe and more
widely taxation rates on fuel differ considerably. Annex 4 shows
the different rates of duty in eight countries. It illustrates
that the percentage of duty and taxes in the pump price varies
significantly from country to country. Of every litre of petrol
sold at the pump to consumers in the UK currently, approximately
76 per cent of the current price is VAT and duty. For commercial
customers the duty rate on diesel for automotive use is currently
approximately 74 per cent.
6.2 Fuel taxation in the UK is comprised
of two parts: duty @ 48.82 pence per litre for unleaded petrol
(at 23 October 2000) and VAT @ 17.5 per cent (at 23 October 2000).
6.3 Governments use fuel taxes to influence
demand and the wider market place. For example, some countries
raised tax levels in the 1980s when prices to consumers fell in
order to maintain the drive for conservation of supplies and help
balance of payments deficits. More recently, governments have
used taxation policies as part of their environmental policies,
such as encouraging motorists to use unleaded petrol by having
differential rates of tax on different products. (These products
themselves cost different amounts to process, so sometimes lower
taxes help encourage consumers to buy particular products which
they might not otherwise choose to buy.)
6.4 Even though the tax applied to pump
prices has risen substantially over the past few years, there
has been little or no change in the total fuel demand in the UK.
Demand shifts nationally from one fuel brand to another, based
on relative price positioning, have certainly been evident, but
there does not seem to be an effect on overall demand.
7. THE COMPETITIVE
7.1 Shell produces just over 2 per cent
of the world's oil (see Annex 2) and although a high crude price
means Shell will show increased profits in the short term from
its upstream business, this leads to commercial difficulties in
the downstream sector, in a highly competitive market. Profits
from the upstream part of the business fell very dramatically
when crude prices were low, in part contributing to the very poor
financial results experienced collectively by the major oil companies
as recently as 1998.
7.2 The setting of fuel prices is a complex
process. Apart from taxation, product costs, and distribution
costs the main determinant of prices paid by consumers and commercial
customers is the extent of local competition. We monitor thousands
of Shell and competitor prices every day, as we believe do other
7.3 Petrol prices change frequently to reflect
the variation in the intensity of competition between different
locations. Shell operates a wholesale price floor and ceiling
to ensure that prices paid by retailers are kept reasonably close
across the country. The actual retail price, however, is set by
the individual retailer according to the requirements of his/her
business and the local market conditions. Independent service
station dealers (many of which are branded in the identity of
those well known companies which provide their fuel for a period
of time) set their own prices. In locations where the turnover
is low the retailer has to obtain a larger margin in order to
cover the fixed and other costs of running the business and maintain
a fuel supply in the locality. It is against the law in the UK
for Shell and other oil companies to set prices for independent
7.4 Whilst we do not consciously subsidise
loss making sites, the intense nature of price competition effectively
means that we do have to support some of them. In recent years,
margins have been extremely low (negative in some cases), and
we have not been able to restore margins to a level which will
sustain the business. This is due to market forcesour retail
prices would be higher than others in the market and we would
lose market share. This is a general problem throughout the industry.
7.5 Local fuel pricing is a complex process
based on locally competitive conditions. We would be prepared
to submit to the Committee details of these processes in commercial
confidence. Shell cannot discuss its pricing policies or proposed
changes to its prices with anyone outside of the company. Such
action would be contrary to UK and EU competition law.
7.6 A number of inquiries have been held
in the UK in recent years by the Monopolies and Mergers Commission
(MMC) and The Office of Fair Trading (OFT). No Inquiry has concluded
that the practices of the oil companies are disadvantaging consumers,
either commercially or at retail sites. In a study in 1998 entitled
"Competition in the Supply of Petrol in the UK" the
OFT concluded that supermarket expansion has fundamentally changed
the market place in the period since the MMC last reported in
1990. Supermarkets' market share has grown from 5 per cent to
around 23 per cent. The oil companies have responded by diversifying
into other product lines and concentrating on higher volume sites.
7.7 The OFT did not find any evidence to
suggest that petrol prices, across the UK, reflected either predatory
or collusive behaviour. Overall, the OFT found that the UK fuel
market is operating competitively and does not warrant any intervention.
7.8 Shell agrees with this. The UK retail
and commercial fuels markets are amongst the most intensely competitive
in the world. Shell's profitability in its downstream operations
has been minimal since the commencement of a price war in 1996.
The reality is that within the UK, Shell does in effect support
its downstream business from other areas, in that intense competition
in the refining and marketing of fuel in the UK has resulted,
for a number of years, in these activities making very little,
if any, profit. Shell does not believe that the current position
is sustainable or viable in the longer term. This is evidenced
by the continued closure of retail sites, whether those owned
by oil companies or by individuals. Ultimately shareholders expect
to see a return on investment in any activity, in this case UK
fuel refining and retailing. We should stress that we do not see
changes in fuel taxes impacting upon this situation; the key to
achieving acceptable returns is to find a successful, attractive
formula for satisfying customers.
7.9 We acknowledge that there remains a
perception that the retail fuel market is not competitive, despite
the findings of official inquiries. It is perhaps useful to comment
briefly on the operations of markets in general in this context.
In markets of any sort where there are supposedly high profits
to be made, it is usual for new entrants to enter to enjoy those
profits, provided there are no major barriers to entry. In the
case of fuel retailing there are no significant barriers to entry.
However, one of the distinguishing features of this market in
the UK has been the process of site closures over many years.
8.1 Motor fuel is a key component in the
costs of many businesses. This will remain the case even where
different fuel types are used and developed over time. Since fuel
taxation makes up the majority of the end price to consumers,
it is clearly relevant to business. The non-tax elements of the
cost are dictated largely by global market forces which are beyond
the direct control of any players in the UK economy, although
Government can and does seek to influence major producers in OPEC.
The high level of competition in the market means that there are
strong downward pressures on product prices, such that fuel stations
close as they are no longer economically viable.
23 October 2000