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Price at the pump to price on the invoice – Falling oil prices can be bane and boon

On the top of the till at my local petrol station is a small printed leaflet. The owner regularly reprints it (I think at least weekly) and carefully displays it in a little plastic case where everyone can see it. The subject of his bulletin is the current cost of a litre of fuel and how this breaks down as the price at the pump. This is split into four sections, Duty, Product, VAT and Retailer and Delivery, and it clearly outlines the cost of each area. Every customer that buys fuel from the station can see the notice. Occasionally it will start a conversation, and this is most often about the amount of duty and vat in the cost which, as I am sure you are aware, represents the majority of the cost. Recently though, the topic of conversation has changed to a focus on the second category, product. The question is usually if the price of oil is falling, how come the price at the pump isn’t that much lower?

Of course, the price is currently lower at the pump than it has been for some time. If you compare with last year the cost of fuel has dropped by around 20 – 22p a litre which is, in fairness, quite a big drop. The public perception (if the discussions at the till are anything to go by) is that the drop should be more.

I follow this scenario with interest because, for obvious reasons, fuel prices are important to us. For the transport industry, the recent plummet should have been a good thing and on the whole clearly lower fuel processes are something we should be happy about. Lower fuel cost means lower transport cost, which should mean more use of road freight.

There is a bit of a cloud to this silver lining though which is the delay between the drop as trumpeted in the press, and the effect of that drop as seen on the bottom line expenses for a working logistics business. In the real world, we cannot simply expect the transport industry to react minute by minute on oil prices. Even where there is a fuel surcharge built into the contract the effect of an oil drop takes a relatively long time to filter down to the lorry.

There is a further misconception in play here as well. When the price drop eventually is reflected in the cost of shipping, the revenue generated by the shipment drops along with it. So relatively the amount of income stays roughly the same.

Add into this mix the fact that when you break that down into the cost of a single shipment (which further dilutes the potential price drop and the maintained base relative cost of duty and vat) it soon becomes apparent that there is very little to pass on to the customer.

It is a sad fact of life that, as we all know, the real high price of fuel is in the duty. Despite all the chatter of the sub pound litre, and any continued decline in the crude oil price, it is unlikely to make a very big difference in the pocket of the transport company.


Julian Thompson

Published by Julian

over 7 years ago


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