Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by Esso Petroleum Company Limited


  In this document, Esso will show that UK after-tax pump prices are the highest in Europe—by a significant margin in the case of diesel fuel. On a before-tax basis, however, UK prices are amongst the lowest in Europe.

  The submission also demonstrates unequivocally that the rise in pump prices since January 1999 has been a consequence of rises in duties and taxes and a decline in the value of sterling relative to the US Dollar as well as increases in the cost of the raw material. The margin between the wholesale price and the retail pump price (the gross wholesale-retail (WR) margin) upon which a retail fuel marketer's business is based has, in fact, declined over this period.

  Esso is not in a position to comment on the overall impact of current levels of motor fuel taxation on the competitiveness of UK enterprises.

  If, however, it were decided that a reduction in duty rates targeted at the haulage industry was an appropriate policy to pursue, Esso would prefer a system of a duty rebate along the lines of the existing rebate available to public service vehicle operators. The efficacy of such a scheme would be improved if Customs & Excise accepted delivery invoices issued through fuel card schemes as valid documentation for recovering duty (as is already the case with VAT recovery). Esso does not see the introduction of "blue diesel" as an effective policy measure owing to the significant costs associated with the segregation of an additional fuel grade through the distribution system.


  Esso Petroleum Company Limited (Esso) is the downsteam UK subsidiary of Exxon Mobil Corporation, which was created in December 1999 through the merger of Exxon and Mobil Corporations.

  Around one vehicle in six is fuelled through our network of around 1,500 service stations. Esso also has a one seventh share of the industrial and wholesale market, delivering to approximately 1,100 customers at 15,000 delivery locations. Through a national network of Branded Distributors, we supply the small industrial and commercial markets.


  The Select Committee inquiry into "the impact of current levels of motor fuel taxation on the competitiveness of UK enterprises" is not an issue upon which Esso is in a position to comprehensively comment.

  Transport costs are only one element affecting UK business competitiveness. Other factors include the general level of business taxes, the legal and regulatory regimes, wage levels, foreign exchange and interest rate policy, the cost and availability of capital and social welfare costs. Similarly, motor fuel taxation is only one element of transport costs.

  This submission therefore focuses on those issues upon which Esso is in a position to comment. It addresses:

    —  an up-to-date survey of road fuel prices across Europe on a before and after tax basis.

    —  an analysis of how pump prices have changed from the $10/bbl crude oil price environment of early 1999 to today's $35/bbl environment.

    —  some specific comments on potential policy options upon which Esso has views which may be helpful to the Committee if it does indeed conclude that high levels of motor fuel taxation are adversely impacting UK competitiveness and that selective reductions (as opposed to across the board options) to, for example, the road haulage sector are appropriate.


  Shown below are graphs developed from data collected by Oil Price Assessments Limited (OPAL), a UK based consultancy. The charts show average pre- and post-tax pump prices for unleaded Euro Premium petrol (UL (95) and diesel (ADO) in the major markets of Europe for the month of September 2000.

  The graphs show clearly that including duty and Value Added Tax, UK UL 95 prices are the highest of our nearby trading partners. This is even more pronounced in the case of ADO where UK pump prices are a minimum of 22 pence per litre (£1.00 per gallon) higher than anywhere else in the survey.

  On a pre-tax basis, however, UK UL 95 prices are the lowest in the European countries surveyed while only Portugal (where pump prices are effectively Government controlled and a cross-subsidy between petrol and diesel artificially deflates the pre-tax ADO price) currently has lower pre-tax ADO prices.

  The message is therefore clear. If UK business is being put at a competitive disadvantage through high fuel costs, then the issue is one of the high level of fuel taxes in the UK and not pre-tax fuel costs.

  It should also be noted that issues of competitiveness extend beyond the EU. The United States, for example, is a significant trading partner of the EU and the low fuel prices there resulting from low rates of tax will impact relative competitiveness.


  The interplay of crude oil prices, wholesale petrol and diesel prices, duty, VAT and gross WR margin can best be illustrated by analysing market conditions in January 1999, when crude prices averaged $10.00/bbl and early-October 2000, when crude prices were around $34.00/bbl. The analysis outlined below has been developed using public domain data and is not commercially sensitive. It is a generic example which does not necessarily reflect the actual costs and margins of ExxonMobil or any other company.

  The first chart examines developments in UL 95 prices over the period.

  The rise in raw material costs from 5.2 pence/litre to 16.1 pence/litre in part reflects a rise in Rotterdam cargo market prices (published daily in, for example, the "Financial Times") from $116.4/tonne to $314.5/tonne. Though there is a close link between crude oil and oil product prices, the link is not a mechanistic one. Prices for individual products are subjected, for example, to specific supply/demand pressures. It should also be noted that oil products are typically traded in US Dollars and that over the same period, Sterling weakened against the US Dollar from $1.65=£1 to $1.45=£1, thereby further increasing the raw materials price expressed in local currency. To be specific, of the 10.9 pence/litre rise in the raw material cost 8.8p (81 per cent) results from the higher cargo market price and 2.1p (19 per cent) from the exchange rate weakening. The increase in duty reflects the duty rate changes imposed in the March 1999 and 2000 Budgets while the VAT component reflects 17.5 per cent of the final pump price. The gross WR margin is simply the difference between the pump price and the sum of the raw material, duty and VAT costs. A number of organisations publish average pump price data, including the Automobile Association, the Society of Motor Manufacturers and Traders and the Department of Trade and Industry (monthly, in Table 30 of "Energy Trends").

  Again, the message is clear. Pump prices have risen because the price in US Dollars of the raw material has risen. The fall of sterling against the US dollar has magnified this impact when raw material costs are expressed in UK pence per litre. Duty rates have also increased over the period. VAT, being an ad valorem tax, also magnifies any increase in pump prices. Despite a rise in pump prices of around 15p/litre, the gross WR margin over this period has in fact fallen significantly.

  The gross WR margin has to cover the cost of getting the product from the refinery, storing it in a distribution terminal, trucking to the service station, and contributing to the operating and overhead costs of the service station. Other cost elements which need to be covered by the gross margin include advertising and promotional costs, additives, bad debts and the costs of merchant fees on credit and debit cards transactions. Only the balance is available as profit for the retailer and oil company. The above analysis shows that, far from improving margins, the failure of average pump prices to match rises in raw material, tax and duty rates has, on average, resulted in lower margins. A number of public domain studies (most noticeably by the Office of Fair Trading in May 1998 and again in July 2000 in their report "Petrol and Diesel Pricing in the Highlands and Islands") suggest that in this fiercely competitive market the long term average gross WR margin has been around 5p/litre.

  The chart above shows a similar picture for diesel fuel (ADO). The larger proportionate rise in ADO raw material costs, reflects market pressures—specifically the increased demand for heating oil (the primary alternative use for this material) as stocks are built in advance of the northern hemisphere winter. The gross WR margin here is squeezed to the extent that the pump price barely covers raw material, duty and VAT costs.


  A number of options to reduce the cost burden on road transport users generally and the road haulage industry in particular have been suggested. We feel it may be helpful to comment on some of these options.

(a)  Lower Excise Duties for Petrol and Diesel for all users

  Road fuel duties are levied at a high rate relative to other levels of taxation. In addition to raising revenue, successive governments have justified high road fuel duty rates on a variety of environmental grounds. A number of commentaries on this issue have been produced, most recently by Professor Stephen Glaister[1]and The Institute for Fiscal Studies.[2] Both point out the limitations of road fuel duty as a policy instrument. Given these limitations, lowering excise duties for petrol and diesel for all users is, by definition, an effective way to reduce cost burdens on road transport users. This scheme would be administratively easy to put in place, the oil industry having implemented some 23 duty rate changes (primarily increases rather than decreases) over the last 20 years.

(b)  Lower Excise Rates for Diesel Only

  Similar comments to option (a) apply. However, such a proposal would leave the limitations associated with high levels of petrol duty unaltered. The reduction would, however, be more targeted at the tradeable goods sector if UK competitiveness were a key policy goal. The market for passenger car diesel fuel versus petrol would, however, be further distorted.

(c)  "Blue diesel"

  It has been suggested that a lower rate of duty for diesel fuel specifically used by hauliers could be implemented. The current "red diesel" scheme might be extended to create a "blue diesel"—a fuel which would carry a lower rate of tax than is currently the case but which would be higher than the rate available for off-road use. A different dye marker would be used to differentiate the fuel—which would only be made available to bona-fide hauliers.

  Duty is paid, and hence the product dyed, as it leaves a bonded area (typically a refinery). Such a proposal would therefore require a new segregated distribution to be set up in refineries and distribution terminals—which potentially would be costly. Many retail forecourts would be unable to offer an additional grade of fuel as segregated tankage and pumps are not available. If forecourt facilities could be made available, it would be at the expense of providing a speedy and flexible service to non-haulier customers. The retailer would not be able to verify that the user is entitled to access to the lower duty product and it is not therefore obvious who would police such a system.

  It is therefore highly unlikely that more than a minority of retail outlets would be able to offer the service even if the cost proved acceptable.

  To take full advantage of the lower duty rate would therefore mean that many hauliers would have to return to a higher level of dependence on self-storage. This may actually significantly reduce the effectiveness of any favourable tax treatment since they would have to bear the costs of the storage and pumping facilities and carry the inventory costs.

  There would also be an increase in the risk of theft and non-approved use.

(d)  A Duty Rebate for Hauliers

  Such a proposal would potentially simply be an extension of the existing scheme whereby bus operators receive a duty rebate. Bus companies currently pay the full duty to the oil companies and claim back 75 per cent of the duty on a quarterly basis for mileage specifically designated as "stage carriage" or bus stop routes. Typically we understand that more than 90 per cent of a bus company mileage is subject to this rebate. This system has no additional administrative burdens for retailers and oil companies and presumably any extension of the scheme could be applied to haulage companies.

  Without additional measures, however, such a scheme would only work effectively were hauliers to resort to self-storage as existing systems do not permit the rebating of duty on fuel card purchases at service stations. The proposal would therefore have a number of the disadvantages of the "blue diesel" scheme outlined above.

  Such disadvantages could, however, be overcome through the use of fuel purchase cards. HM Customs & Excise accept delivery invoices issued under this scheme as an acceptable record against which VAT can be reclaimed. Were HM Customs & Excise to accept that such a record could also form the basis of a duty rebate, hauliers would be able to continue to lift from service stations and claim a duty rebate. The systems necessary to implement such a proposal are already in place in Esso and no additional administrative burden would be imposed on either the haulier, or the retailers.

  Therefore, a possible extension of the bus rebate scheme on the lines outlined above would be preferable to the "blue diesel" scheme.

27 October 2000

1   "The effect of fuel prices on motorists", Glaister and Graham, Imperial College of Science, Technology and Medicine, London, September 2000. Back

2   "The distributional effects of taxes on private motoring", Blow and Crawford, The Institute For Fiscal Studies, Commentary 65, London, December 1997. Back

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