UK Oil Industry
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This assignment is prepared with the respect to the Module of “Business Environment.” I am assigned to prepare a paper by our honorable instructors Ellie Semsar to examine the factors that influence and determine the oil price in UK oil industry. The report also aims to provide how much and to what extent, Government policies influence oil prices in UK. Objective of the Assignment:
This assignment has been prepared considering a number of objectives. The objectives are: * Identify and evaluate the factors that influence and determine the oil price in UK oil industry. * Understand how and to what extent UK government policies make an impact on the oil prices. * To show the analysis of the current oil prices and report how the trend goes. * To perform necessary analysis and present it with charts and tables from reliable sources. * To explain the factors that influence supply and demand of oil prices in UK * To show an understanding of relevant economic principles, concepts and theories * Understand and apply the main techniques of economic analysis. Sources:
Primary sources couldn’t be managed to prepare this assignment. Secondary Sources have been used to make this report. Secondary information was collected from online journal, articles and the official web sites of Nestle. Some other sources that have been used to find out the information are given on the Bibliography section.
Background of Oil industry in UK
Oil is one the most important resources in the world that controls every spheres of human lives. Especially in Developed countries, oil seems to be most needed. Crude market oil are very much needed in different operations of developed countries, with 84,249,000 barrels consumed globally each day as of 2009. (Ross Lane, 2012). Because of the oil supplies in UK, oil prices vary greatly from time to time. This assignment analyzes the current market situation for oil prices in UK. This report identifies the factors that affect supply and demand of oil prices, how government legislation affect oil price in UK. Detailed analysis of oil prices in UK over the years has been shown with proper graphs and tables. Graph of last three years’ home heating oil has been shown and the price trend has been analyzed. Also how government policy influences oil prices in UK has been analyzed. The standard economic theory of supply and demand has been related to the necessary scenario.
Analysis of the Current Prices of Oil in UK:
Oil prices in UK are in rise in January, 2013 after last 3 month of price fall. The price of oil is rising day by day. Price gap between Petrol and Diesel has widened from 5 pound to 8 pound in last four months. Diesel Price has fallen by 0.06ppl from 140.04ppl to 139.08ppl. Northern Ireland has recorded the highest unleaded oil price at 133.2ppl. Northern Ireland also recorded highest rate for Diesel at 140.6ppl in January, 2013. Yorkshire and Humberside and the northwest side have recorder their cheapest oil price 139.04ppl. The Automobile Association Limited, (2013). Home heating Oil prices trends has shown fluctuations over recent years. Below, oil prices in last 3 years and I oil prices trend from 2012 to 2013 is given:
Figure 1.1: United Kingdom Average Oil Price from 2012 to 2013. (Boiler Juice Ltd, 2013). The graph shows prices have been fluctuated up and down several times. In June, prices tend to be the lowest, 52ppl. In December price was at its peak 65ppl. Although in start of January 2013, price tend to go lower but now in February, home heating oil prices are again going up to the peak of 65ppl. To know more about the trend of the oil price fluctuation, oil price trend of last 3 years is given below:
Figure1.2: United Kingdom Average Oil Price from 2010 to 2013. (Boiler Juice Ltd, 2013). Figure 1.2 shows home heating oil prices in UK for the last three years. The graph shows that after 2010, prices has increased up to 60-65ppl where before it was only 40-50ppl. On start of 2011, price has gone 70ppl which is the peak price of this chart. Although prices have lowered, it is again on rise up to the peak in January, 2013. Retail prices of Petroleum oil:
Retail prices of petroleum oil are increasing every year, although there was a small break of price decrease but in recent years its back on rise. According to UK Government official website’s publication Statistical Date set of Oil Petroleum products: Annual prices of Petroleum products from 2000 to 2013 are given below:
Table 1.1 Typical retail prices of petroleum products(1)(5) 2000 to 2013United Kingdom| | Pence per liter|
| Motor spirit| Diesel(2)| Standard grade| Gas| | | 2 star| 4 star/ LRP (4)| Super unleaded| Premium unleaded(6)| | burning oil(3)| oil(3)| | 2000| January| | .. | 80.84| 84.15 | 75.38 | 77.75 | 17.84 | 18.15 | | 2001| January| | .. | 82.19| 85.06 | 76.85 | 81.63 | 19.86 | 20.46 | | 2002| January| | .. | 75.94| 78.48 | 69.90 | 74.65 | 14.61 | 14.71 | | 2003| January| | .. | 78.15| 80.47 | 74.95 | 76.38 | 17.83 | 18.63 | | 2004| January| | .. | 80.04| 81.49 | 76.20 | 77.92 | 18.33 | 18.95 | | 2005| January| | .. | 87.16| 87.43 | 78.99 | 84.15 | 22.16 | 23.99 | | 2006| January| | .. | .. | 94.73 | 88.84 | 93.07 | 31.58 | 33.60 | | 2007| January| | .. | .. | 94.80 | 86.91 | 91.44 | 30.88 | 34.03 | | 2008| January| | .. | .. | 110.59 | 103.71 | 108.70 | 43.90 | 51.01 | | 2009| January| | .. | .. | 93.30 | 86.33 | 98.74 | 36.01 | 43.83 | | 2010| January| | .. | .. | 118.53 | 111.49 | 113.31 | 42.49 | 50.64 | | 2011| January| | .. | .. | 134.83 | 127.53 | 132.08 | 55.14 | 61.90 | | 2012| January| | .. | .. | 140.40 | 132.89 | 141.34 | 61.04 | 70.74 | | 2013| January p| .. | .. | .. | 132.00 | 139.68 | .. | .. | |
**Source: Statistical data set Oil and petroleum products: annual statistics. Open Government Licence, UK. (2013). (1) The estimates are generally representative of prices paid (inclusive of taxes) at the pump on or about the 15th of the month. Estimates are based on information provided by oil companies from 1977 until 1994. From January 1995 data from super/hypermarket chains have been included. (2) From July 1999 diesel prices represent average prices for Ultra Low Sulphur Diesel which now accounts for virtually all diesel sold. Pump prices for both diesels are broadly the same. (3) Typical prices for deliveries of up to 1,000 litres of standard grade burning oil and between 2,000 and 5,000 litres of gas oil. Prior to 1977, prices were for deliveries of 900 litres of standard grade burning oil and 2,275 litres of gas oil. Since April 1994 prices include VAT at a rate of 8% until September 1997 when the applicable rate was reduced to 5%.
(4) From October 1999 Four Star prices represent ‘Lead Replacement Petrol’ (LRP) which had replaced Four Star at 95 per cent of outlets at that time. Leaded petrol has now been phased out. Pump prices for both petrols are broadly the same. The LRP series has been discontinued from September 2005 due to the low volume of sales.
(5) For rates of duty and VAT see Annex C.
(6) From April 2001, Premium unleaded prices represent Ultra Low Sulphur Petrol (ULSP), which now accounts for virtually all Premium unleaded sold. The pump prices for both fuels were broadly the same.
The Determinants of Oil Prices in UK:
Oil reserves are limited and demand for this limited resource is being increased day by day. Also high demand of global commodities has led to the price fluctuations of oil prices. Two major determinants of oil prices in UK are: * Supply & Demand
* Market Sentiment
Supply & Demand:
Supply and Demand of oil in UK is almost same to the concepts of economic supply and demand of resource. As demand increases or supply decreases, prices go up. As supply increases as well as Demand is comparatively less, price goes down. But in recent times, prices tend to be upper scale as supply is getting lower every day. But that is not all. The price we see generally set in the oil future market. And oil future contract is an agreement that provides the opportunity to one party to buy oil at a previously fixed rate on a future date. Under a future contract, both the buyer and seller are obliged to fulfill their part of their agreement. Future agreements are done by two types of future traders: * Hedgers
Hedger future traders are the ones who buys oil to guard potential oil price rising. For example: An Airline Company. Speculators are the one who are monitoring the price trend and have an intention to buy oil. But report says that only 3% of transactions are resulted from speculators. (Paul Kosakowski, 2011). Market Sentiment:
The other important factor that influence determining oil price in UK is Market Sentiment. When people merely belief that oil price is going to rise rapidly sooner in the future that will cause a great demand for oil. Beside traders like Hedgers and Speculator are tend to act more dominantly in these situations to minimize their future losses and maximize their profit, thus making an impact on the oil price. Also the mere belief that oil price is going to be rapidly decreased soon can result in dramatic decrease of oil price in the present since oil future contracts are sold. (Paul Kosakowski, 2011). Other than the major facts, there are some other factors that affect oil prices in UK: Declining Production:
As domestic oil production is reducing since 2007, the country needs to import oil to continue its economy. As the amount of oil import increases, it generates higher pressure on the supply and increase the oil price. Restrictive Legislature:
If a Nation decides that it is curtailing or banning oil exploration in an area where large amount of oil is stored, commodity market price will face the loss of new potential crude oil production into current oil production. Legislation curtailing oil production will impact on oil prices to rise. (Rich Finzer, 2012). Political Unrest:
Majority of the oil production comes from Middle East and Africa. Political instability of those countries where most of the oil sources are situated and from there oil is acquired affects the oil price in UK. Natural
Natural and Manmade disaster causes severe price fluctuations for oil price. According to Kimberly Amadeo, (2012). “Hurricane Katrina caused oil prices to raise $3 a barrel, and gas prices to reach $5 a gallon in 2005. Katrina affected 19% of the nation’s oil production. It came on the heels of Hurricane Rita. Between the two, 113 offshore oil and gas platforms were destroyed, and 457 oil and gas pipelines were damaged.” Factors Affecting Supply and Demand of Oil prices in UK:
Several factors affect the demand and supply of oil prices in UK. Among them some are major important: * Increased consumption of Oil:
Consumption of oil has increased severely recently. Oil demands are highest in the developed countries. With more generated demand, and since supply is limited, prices tend to be on the rise all the time. * Oil Reserves:
Prices of oil mostly depend on oil reserves of UK. With low oil reserves, prices tend to be higher and with greater oil reserves in the country, price will be moderate or lower. Also restriction on import influences the prices of oil in UK. * Exchange Rate:
World exchange rate affect oil price big time. With decreasing value of GBP, oil prices will be higher. When oil prices increase, people have to count for more pence than before due to loss of value of currency. * Speculation:
Other than physical supply of oil reserves, financial market also has the influence to affect oil prices through speculation. Future traders influence oil price more rather than them who are currently distributing. (Ross Lane, 2012).
Government Policies to influence Oil Price in UK:
Government policies greatly influence oil prices in UK. Transport Secretary Justine Greening has asked oil retailers in UK to level up their code of conduct; otherwise necessary step will be taken. The government will take legislation if necessary. According to Justine Greening: “Petrol prices go up instantly when wholesale prices rise, but when wholesale prices fall, it can take weeks for them to come down again. I want companies to come up with their own plan as soon as possible – and I’m talking days and weeks, not months. That way we can get prices down faster, rather than having to pass time-consuming legislation. But we will certainly do that if we have to.” (The Telegraph, 2012) When policy is strong or making the oil companies go for price reduction, the companies have to abide by the government legislation. The AA president Edmund King Said: The AA supports a move towards transparency on fuel prices. However, with record prices cutting sales by 5% last year and 76% of AA members cutting back on car use, other family spending or both, regulation has to remain an option.” (The Telegraph, 2012)
The report is prepared to analyze the effect of Oil price in UK market, to determine what are the factors that affect supply and demand of oil prices, how government legislation effect oil price in UK. Detailed analysis of oil prices in UK over the years has been shown with proper graphs and tables. Graph of last three years’ home heating oil has been shown and the price trend has been analyzed. Retail prices of petroleum oil are increasing every year, although there was a small break of price decrease but in recent years its back on rise. According to UK Government official website’s publication Statistical Date set of Oil Petroleum products: Annual prices of Petroleum products from 2000 to 2013 have been shown in this report. Two determinants of oil price have been identified in this report. One is supply and demand and other is market sentiment. Supply and Demand of oil in UK is almost same to the concepts of economic supply and demand of resource. As demand increases or supply decreases, prices go up.
As supply increases as well as Demand is comparatively less, price goes down. But in recent times, prices tend to be upper scale as supply is getting lower every day. But that is not all. The price we see generally set in the oil future market. And oil future contract is an agreement that provides the opportunity to one party to buy oil at a previously fixed rate on a future date. The other important factor that influence determining oil price in UK is Market Sentiment. When people merely belief that oil price is going to rise rapidly sooner in the future that will cause a great demand for oil. Exchange rates, increased consumption of oil, and limited oil reserve has strong role in influencing price of oil. Consumption of oil has increased severely recently. Oil demands are highest in the developed countries. With more generated demand, and since supply is limited, prices tend to be on the rise all the time. Prices of oil mostly depend on oil reserves of UK. With low oil reserves, prices tend to be higher and with greater oil reserves in the country, price will be moderate or lower. Also restriction on import influences the prices of oil in UK. Role of government policies also has been included in this report.
The Automobile Association Limited. (2013). Fuel price report. UK & overseas prices – January 2013. Available: http://www.theaa.com/motoring_advice/fuel/. Last accessed 6th February,2013. Boiler Juice Ltd. (2013). Home Heating Oil Prices. Available: http://www.boilerjuice.com/heatingOilPrices.php. Last accessed 6th February,2013. Paul Kosakowski. (2011). What Determines Oil Prices?. Available: http://www.investopedia.com/articles/economics/08/determining-oil-prices.asp#axzz2K74EfmGA. Last accessed 9th february, 2013. Open Government Licence, UK. (2013). Statistical data set Oil and petroleum products: annual statistics. Available: https://www.gov.uk/government/statistical-data-sets/oil-and-petroleum-products-annual-statistics. Last accessed 9th february, 2013. Rich Finzer. (2012). Factors That Affect Oil Price. Available: http://www.ehow.com/list_6696635_factors-affect-oil-price.html. Last accessed 9th february, 2013. Ross Lane. (2012). Factors Affecting Demand & Supply of Oil Prices.Available: http://www.ehow.com/info_8621442_factors-demand-supply-oil-prices.html. Last accessed 10th february, 2013. Kimberly Amadeo. (2012). How Are Oil Prices Determined?. Available: http://useconomy.about.com/od/commoditiesmarketfaq/f/oil_prices.htm. Last accessed 10th february, 2013. The Telegraph. (2012). Government warns