Unit 3 Micro: OFT Investigates the UK Retail Fuel Market

The Office of Fair Trading (OFT) has announced that it is launching an investigation into prices at the pumps amidst fears that the retail market for petrol and diesel is not operating properly and causing damage to the welfare of fuel buyers including millions of motorists and businesses. For a long time motorists have complained that the prices they pay are quick to rise when the world price of crude increases, but the cost of filling up the tank falls much less quickly when crude oil is available on international markets at lower prices. This BBC news video report provides some background.Our chart below tracks the weekly average price of petrol and diesel against a benchmark international price for crude oil - is there any evidence here for the wrath of customers?

The trading-watchdog known as the OFT has the power to launch market investigations and draw together evidence from different stakeholders in the industry. As the OFT web site makes clear:

"The OFT's mission is to make markets work well for consumers. As part of this role, the OFT can carry out market studies where it suspects a market is not working in the best interests of consumers."

Part of the terms of reference will be to see if the major supermarkets and fully-integrated transational oil companies are making it more difficult for smaller independent petrol retailers to compete. In particular they will seek evidence on whether supermarkets are selling petrol at below cost pricing funded by a cross-subsidy from their grocery profits. The claim is made that the big four supermarkets are happy to make a small loss on petrol and diesel if it gets more customers through the doors of their stores.

The review will also consider whether there is a lack of competition between fuel retailers in some remote rural communities where the price of a litre of petrol or diesel can reach super-high levels. The UK retail road fuels sector is estimated to be worth around £32 billion. In 2010, around five per cent of UK households’ average weekly expenditure was on road fuels. Calls for an OFT investigation initially came from the Retail Motor Industry Federation.

The number of petrol stations has been declining over the years with many independents closing and the market share of the supermarkets rising. In 1990 there were some 18,000 forecourts. Now there are fewer than 9,000.

Petrol price chart