Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by Shell UK Oil Products Limited


  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 prices—the price could fall sharply tomorrow, just as it has recently sharply increased.

  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 of 2001.

  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.


  5.1  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 of factors:

5.4.1  Exploration and Production of Crude Oil

  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)

5.4.2  Manufacturing

  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 market.

  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.


  7.1  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 companies.

  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 dealers.

  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 forces—our 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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 15 March 2001