Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



  Chairman: As they used to say on Listen with Mother, once we are all seated we will begin.

  Mr Laxton: Before my time.


  1. I am conscious, gentlemen, that you are all equal in status. There is no-one who is a leading spokesman so perhaps, contrary to the usual procedure, we will start with Mr Mumford, if you can introduce yourself, and then work your way along.
  (Mr Mumford) I am John Mumford. I am the Director of BP Oil UK which is the marketing and refining company in the UK.

  (Mr Polkey) I am Steve Polkey for Esso. I am a main Board Director with responsibility for marketing.
  (Mr Jones) Gary Jones, Total Fina Elf UK, Managing Director.
  (Mr Brinded) Malcolm Brinded, Chairman of Shell UK and member of the Fuel Task Force.
  (Mr Codd) David Codd. I am the Managing Director of Texaco Limited.

  2. Thank you. I think you understand, gentlemen, that we are not here this morning directly to quiz you as to why you charge so much or, indeed, so little for the petrol you sell as to try and establish the impact of changes in duty and the way it impacts on prices and the effect that has on what you might say is UK plc. Obviously there will be specific questions which will arise and they may well refer to the experience of last month and they may well refer to questions. Now I realise that as an industry you are always at pains to point out that there is no such thing as a cartel, it is something which is totally absent from your lexicon. As far as we are concerned we recognise that you wish on occasions to make your own points in your own way. If we can avoid undue repetition, I am fully aware of the fact that there is no one of you to speak on your behalf. Maybe we could start off with the first question and the first person who catches my eye will be the person who kicks off. We know there have been upward changes in fuel taxation at least until the last Budget where it rose, but not quite so steeply. What effect does fuel taxation have upon your competitiveness and is it a greater impact than changes in the price of a barrel of crude, if we could have the two things put together? Now who would like to start off, please? Mr Codd, since you laughed most you can start first.
  (Mr Codd) In terms of the increases in fuel duty, the only observation I would like to make is that the most recent study of which I am aware, which is the AA UKPIA Study by Glaister and Graham, argues very forcefully that raising fuel prices only has a very modest effect on fuel consumption. In terms of the impact on our competitiveness downstream, I would argue it is relatively modest and not at all comparable to the impact that rises and falls in crude oil prices have.

  3. You guys would say basically that it does not matter what the level of taxation is within reasonable parameters because people will keep buying it in amounts which keep you happy? Is that a reasonable way of putting it?
  (Mr Brinded) I think it is right to say that at current levels we do not see the demand changing hugely as either tax has gone up or down or as crude oil prices go up or down. It is relatively inelastic, it does obviously change. That is not to say we do not recognise that levels of fuel taxation clearly impact on the businesses that are purchasing fuel and the customers who are purchasing fuel. It is clearly relevant in terms of international competitiveness but, on the other hand, it has to be taken in the round with other issues around taxation. I think where fuel taxes are essentially important is to think about the distinction of different levels of fuel tax between different products. There we have seen that there can be a significant influence on the way one product may come to the fore because it has a preferential level of duty. It has been helpful in getting unleaded petrol much more extensively into the market than a decade ago. It has been helpful with low sulphur diesel and it is helpful also with LPG. There is a 35 pence a litre lower duty on LPG and that is encouraging initiatives in cleaner fuel. The differential can have an impact on customer buying patterns rather than perhaps the absolute level.
  (Mr Jones) We have seen that certainly last year with the introduction of ULSD in the market with a three pence a litre differential on the old derv diesel. We have seen almost complete movement of this cleaner burning product into the market place.

  4. Do I take it then that you are fairly dubious about the environmental claims made by the Treasury as far as the significance of taxes on consumption? Is that being over-simplistic or does that ignore other aspects like the introduction of lean burning cars and things like that? How significant in your experience is, for example, the lean burn car, the technology of the vehicles into which your fuel goes? Is that significant as well?
  (Mr Polkey) Let me say a little bit about the underlying environmental question you are asking. Certainly I agree with what the other gentlemen said, that I think that the demand is relatively inelastic so depending on the price moving up and down it does not make that much difference to consumption. In terms of the new technologies that have been brought in, everything that we see and, indeed, the auto oil study found, says that from an air quality point of view we will meet those standards by 2005. So we are on track to meet that. I guess there are other policy things that I have seen which have been stated that the fuel tax is trying to do, things like reduce congestion, reduce the level of accidents, etc.. I think those are questionable. I think the fuel tax is a relatively blunt instrument to try and do that. There are some better targeted things if you decide what your policy is. It may be if you want to try and hit congestion or something like that, road tolls congestion taxes are actually a more targeted approach. If you want to impact vehicles, it may be that vehicle excise duty is a better targeted approach to do that. The key is to figure out what policy is behind these things. I think the general environmental thing is a bit too wide ranging.
  (Mr Brinded) It is on the environmental front that the differential level has made the most impact in the past and it is still doing.

  5. You would say that your experience suggests that blanket taxes, if I can put it that way, as distinct from differential taxes are not as effective in securing the kind of environmental objective of an overall reduction in demand?
  (Mr Jones) I think that is difficult to say because there are just too many factors to be taken into account. The whole level of the economy, what is happening to the car parks, I think there are a lot of factors that are affecting the current level of fuel usage. Certainly we have seen a flattening of the growth in transportation fuels but, again, that is perhaps partially affected by the increase in taxation, it is partially affected by the change of the car park and different fuels.
  (Mr Mumford) I would totally agree with what has been said. I think the key thing is the differential taxation because the issue is, is there a choice? If there is an alternative that can be switched to then sometimes a very small differential is enough to encourage that shift. If there is no alternative, or if the alternative is one which maybe will take ten or 20 years to bring in, then you are not going to see that impact very quickly. I think that we see the impact of investment, particularly the investment in new technology and new plant and new engines, that is the area where the real benefit comes.

Mr Baldry

  6. If the overall price of petrol has very little impact upon demand, does it thus follow that you individually and collectively are pretty indifferent as to the actual overall petrol price level? If that follows, does it mean that you have or have not made representations to the Chancellor as to what duty on petrol should be? After all, there are millions of your customers out there who for every pound they spend on petrol 86 pence of that is going to the Exchequer. Do you see it as any part of your role as they being your customers to make representations to the Chancellor about the overall level of petrol duty or are you simply indifferent to that and saying "Whatever level of duty is placed upon us we will pass it on to the customer and that is a matter as between them and the Government, them as taxpayers and the Government as the government. It is an electoral matter"? Do you make representations to the Chancellor in the run-up to the Budget or do you just let him get on with it?
  (Mr Jones) As far as I know we have not made representations to the Chancellor on the overall level of taxation. Certainly we have discussed some of the differential levels. We do see ourselves as a very efficient tax collector.

  7. It is a matter of indifference to you here in the UK that UK motorists, your customers here, are paying substantially more than motorists elsewhere in the European Union?
  (Mr Mumford) I would not say it is a matter of indifference. We see our role as trying to provide the cheapest fuel we can for our customers. In the UK currently we have the cheapest fuel in Europe before tax.

  8. Before tax, yes, but clearly so far as your customer is concerned he is not dancing round the forecourt saying "Yippee, I have found the cheapest petrol before tax" because actually what they are concerned about is the price at the pump. Therefore, if you are trying to find your customers the cheapest petrol surely you should be making representations to the Chancellor, at least drawing to his attention the differential between duty paid here and duty paid elsewhere within what, after all, is supposed to be a single market elsewhere in the European Union?
  (Mr Mumford) Yes. I think that information is extremely well documented. We do get a weekly price report of the before and after duty petrol prices around Europe. We and our customers are both acutely aware of this issue. The Treasury is also acutely aware. If it comes to the issue of advising on particular types of fiscal measures, then I think we would feel we are not that confident to comment on the effectiveness of certain things in other people's industries.

  9. Every other industry which is hit by tax, I think the industry concerned makes jolly sure the Chancellor understands the impact of that tax on their customers. It is not surprising in part that we are starting to see direct action because if customers feel that you, as the provider, are not standing up to their interests, who is? Maybe one of the bits that is missing in this equation is your indifference to the amount of duty which is put on petrol so clearly the Treasury feels they can continue to escalate the petrol duty without anyone making any complaint in the industry whatsoever.
  (Mr Brinded) I do not think that we would necessarily be the most influential voice with the Treasury anyway, to take your last point. I think the point is that the impact on motorists is represented by the motoring organisations like the AA. The impact on business as a whole is best represented by the CBI. I think that is where the representations are made and best made. I think where we can focus is on talking about things like differential levels of duty which will have an impact on particularly the environment and clean up.


  10. On the other hand, let us face it, you do use petrol as businesses or diesel. You transport vast amounts. One of the reasons probably why we are having this inquiry is the events of September resulted in your people being unable to get out of the refineries and into the depots.
  (Mr Mumford) Yes.

  11. You use this. You pay that, I presume.
  (Mr Mumford) Yes.

  12. I have not yet been able to establish that you do not, so I presume you do.
  (Mr Polkey) We do.

  13. Are you relaxed about it because you make so much money elsewhere that it is a mere bagatelle? It does not matter. I am sure that is not what your shareholders believe.
  (Mr Mumford) I would not say it does not matter but, to get it in perspective, I think the duty that we pay in order to deliver fuel amounts to about 0.1 pence per litre, in other words that is the element of the transportation cost accounted for by duty, it is there, it is a cost. It is not one of the biggest costs.

  14. Is it a more significant cost than the way in which you have to pay duty between the forecourt and the refineries in the sense of having to pay duty earlier than some of your competitors in the retail business?
  (Mr Mumford) It is a larger cost.

  15. Which is a larger cost?
  (Mr Mumford) The larger cost is the duty that we actually pay.

  16. The timing of the duty?
  (Mr Mumford) Sorry, no, the duty on the fuel that we consume.

  17. Right. You make more noise about when you have to pay the duty usually than the fact that there is duty on your transportation?
  (Mr Codd) Nobody is suggesting that duty is going to go down to zero.

  18. No.
  (Mr Codd) Perhaps the significance of the point at which we pay duty is potentially more significant to us than the delta between what might be regarded as an optimum and minimum level of fuel duty.

Mr Cunningham

  19. There have been a number of suggestions mooted, as it were, regarding the Chancellor's pre Budget statement. What would be the worst case scenario for you as a result of that statement?
  (Mr Brinded) I would just say the point has been made in relation to the downstream industry in relation to fuel duties, it is not something which has a huge impact. It is a cost, it is a small cost to our business, it is not a differential cost between us but it is a cost we all bear. In a sense, being a highly competitive industry, we are much more conscious of things which might differentiate between us. I think the concerns I would have would be if whatever happens there is a recurrence of the sort of blockages and protests and intimidation that we had outside our terminals six weeks ago. I think that is the thing that we would like to see not happen.

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