Economic Market Analysis Of The Uk Road Transport Fuel Market

Executive Summary

Road transport fuel keeps the transport system alive in any country. In the first part of the market analysis, the size, type of products, taxation strategy, regulatory environmentof the UK road transport market has been discussed. In the second part the trends of the quantity and price of fuels over time of 15 years have been analysed. In thethird part different factors like COVID 19, fuel shortage which have affected the supply and demand of fuel in present times have been analysed. This market analysis also consists of price elasticity demand of transport fuels in the UK. Moreover, a summary of the main issues that affect fuel pricing in the country are also included in the market analysis.

Table of Contents

1. Introduction. 4

2. Analysis of UK Road Transport Fuel Market 4

3. Analysis of Price and Quantity Trends. 7

4. Analysis of Demand and Supply of UK Road Transport Fuel Market 8

5. Analysis of Price Elasticity for Road Transport Fuels. 9

6. Implication of Price Elasticity on Pricing and Government Tax Strategy. 11

7. Evidence based Analysis of Performance Issues on UK Road Transport Fuel 12

8. Final Summary. 13

References. 14

1. Introduction

The following report is an economic market analysis of the road transport fuel market of the UK. The main aim of the report is to provide the client with the information about the important factors affecting the pricing strategy of the UK road transport fuel market.  Consumption is one of the key factors that is going to be considered as an important parameter playing behind the fixation of pricing strategy. This report is going to be a clever short overview of the road transport fuel market and the pricing patterns. Analysis of the price and quantity trends over 15 years of time is going to help in understanding the overall price trend of the market. Different factors like recession, COVID 19, fuel shortage have affected the demand and supply chain of the fuel market. These changes are going to be tracked here as well. Understanding the value of price elasticity, performance analyses of related firms, and providing a summary of key issues that presently are affecting the fuel pricing strategy are the main deliverables of this report. 

2. Analysis of UK Road Transport Fuel Market

38% of the total road transport fuel consumption in the UK is covered by petroleum products and oil which are produced by the downstream oil sector. More than three-quarters of these products which are used in the road transports of the UK are liquid fuels (ukpia.com, 2022). As per the government data of the UK, unleaded petrol, unleaded diesel. LPG and a negligible number of biofuels are the main road transport fuel products that are being used in the UK (gov.uk, 2021). COVID 19 had hit the road transport fuel market of the UK. However, the size of the market has still increased in 2021. Number of the companies in 2021 are 1501 in comparison with 1494 in 2020. However, the number of the dealers have reduced in 2021 which is 5372 in comparison with 5385 in 2020 (ukpra.co.uk, 2020).  Presently in the UK 46 liters of the total fuel consumptions are being done due to road transports and can carry 1.9 billion tons of freight each year (ukpia.com, 2022). If the price of the fuel items from 2004 to 2021 it can be observed that prices are increasing throughout the years. 

Figure 1A: Trend of price change in petrol

(Source: Influenced by gov.uk, 2021)

From the trend presented in the above graph, the amount of tax on petrol has sometimes increased and sometimes decreased. In 2004 the amount of tax on petrol was 79% (gov.uk, 2021). On the other hand, in 2021, the amount of tax on petrol is 63%. Aligning with the tax change the price of petrol has also changed throughout the time period of 17 years (gov.uk, 2021).  

Figure 1B: Trend of price change in Diesel

(Source: Influenced by gov.uk, 2021)

Diesel is the next highly used fuel product in the road transport of the UK. In case of the diesel as well, up to April 2013, the price has constantly increased. If the tax rate on the fuel product is observed, then it can be said that based on the increased tax rates the price has also increased (gov.uk, 2021).  However, the tax rate of diesel is not synchronized in nature. Based on the supply and demand the UK government has sometimes reduced the tax rate and sometimes has increased it.  As an example, it can be stated that in 2004, the tax rate was 82% and presently the tax rate on road transport fuel is 59% (gov.uk, 2021). A differential taxation strategy has been followed by the UK government to regulate the price of fuels. 

From the market trend and the increasing environmental awareness among the UK-based consumers, biofuel usage has increased in the country (assets.publishing.service.gov.uk, 2014). Moreover, supply chain constraints in 2019-2020 due to COVID 19 and fuel shortage crisis throughout the UK as well as an increase in the fuel prices in different years are some of the reasons behind the change of consumption of biofuels in the road transport (bbc.com, 2021). Car taxis, Light vans, Motorcycles and mopeds used 17.8 gallon, 0.5, 0.5 gallons of petrol in 2004 respectively (gov.uk, 2021). However, in 2019, the usage was 10.9, 0.2, 0.2 gallons respectively. Thus, it can be said that consumption of each road transport fuel has decreased. In the case of diesel, the total amount of diesel consumption by all types of vehicles in 2004 was 19 gallons while in 2021, the amount was 23.3 gallons (gov.uk, 2021). Over the years, diesel usage has increased slightly due to its cost-effectiveness.  

3. Analysis of Price and Quantity Trends

It is identified that road transport is one of the major sources of fuel demand in the UK and mainly depends on petrol and diesel for the fulfillment of the fuel level for road transport. The pump price of unleaded petrol has decreased by 9.9 pence per liter which were 7.8 percent lower than the previous year. It was further noticed that the cost of unleaded diesel was reduced by 10.9 pounce per liter which was 8.2 percent lower a year ago (Department for Business, Energy & Industrial Strategy, 2021). The process indicates the rise in the cost level of the fuel in different road transport systems. The statistics further identify the rise in the price level of road transport fuel in the UK. It is also identified that the price has increased from January 2001 to January 2021 (Department for Business, Energy & Industrial Strategy, 2021). 

Figure 2: Price of petrol and diesel

(Source: gov.uk 2021)

There is a growth in the number of automobile cars in the UK in the 21st century. The quantity of the fuel has risen significantly due to the increase in the dependency on the automobile products and road transport system. The usage of diesel in different road transport in the UK has increased recently (Wadud, 2016). It is identified that the government created an incentive for the switching of the road transport system to diesel engines and protection of the environment during the mid-1990s (Wadud, 2016). It witnessed a huge transformation in diesel engines for the automobile cars and road transport vehicles. It is also identified that the consumption level of fuel has increased in England significantly in comparison to Wales, Scotland and Northern Ireland. It is further evident that the quantity in the process has increased due to over-dependence on different automobile cars and road transport systems. 

The information published by the government of the UK suggested that the number of diesel cars in 2005 was 3,91,135 whereas in 2018 the number increased to almost 6,53,969 (Department for Business, Energy & Industrial Strategy, 2021). The statistics suggested the huge growth in the diesel cars in the road transport of the UK. 

4. Analysis of Demand and Supply of UK Road Transport Fuel Market

It is identified from the general theory of demand and supply that if the supply becomes constant, the price is inversely proportional to the demand. The price reduces if the demand increases and vice versa. On the other hand, the price is directly proportional to the supply level if the demand becomes constant (Sinamo and Hanggraeni, 2021). 

Figure 3: Demand and Supply of UK Road Transport Fuel

(Source: Self-Created)

The price equilibrium can be seen during 2013 as the supply and demand has been met at one point during the period. It is identified from the statistics of the road transport fuel of the UK that the supply has increased significantly in the road fuel transport sector of the UK from 2005 to 2020 effectively (Department for Transport, 2021). It indicates that the income level in the household of the UK has increased significantly. The process has suggested that the demand for the automobile product has increased significantly. The overall growth of the income level has enhanced the consumption of different automobile products and the UK road transport process. It is further identified that the supply has decreased significantly due to the rise in taxation level in the UK over the years. It is further identified that the recent rise in the COVID-19 pandemic situation has decreased the supply level (Barua, 2020). The recent regulation has also decreased the supply level. The uncertainty related to the Brexit process has also affected the supply process. 

5. Analysis of Price Elasticity for Road Transport Fuels

The price elasticity is defined as the change in price affecting the demand of the products (specifically the consumption) (Lehner and Peer, 2019). In this context, the price has started falling after 2013 as it was saturated at that level. The supply became higher after 2013 compared to demand and it affected the price of fuels drastically. The elasticity of price of demand of fuel was affected inversely and lower demand of petrol and diesel reduced the price of the fuels in the UK. The figure 1A and B has shown the price distribution during the period of 2005-2020. The price elasticity with demand in the UK for both diesel and petrol has maintained the fundamental theory of economics (approximately) as the price of the fuel started falling after 2013. The price started rising before 2019 due to reduction in supply of fuels. The price of fuel was going up from 2009 onwards as supply of fuel was not changed much during the period. The price elasticity of fuels can be seen from the below figure of registered vehicles in the UK. The vehicle registration numbers went down from 2008 continuously till 2013 due to decrease in disposable income during the period. However, the steady supply of supply could not affect the retail price (despite decreasing demand). The price elasticity was not maintained due to cover charge of duty on fuels. Hence, the price elasticity of the fuel’s demand was poor (not steady as supply) due to overburden of duty on fuel. Therefore, the despite reduction in registration of vehicles, the price remained high from 2009-2012. 

Figure 4: Registered Veichles in the UK

(Source: Veichle Licensing Statistics, 2017)

6. Implication of Price Elasticity on Pricing and Government Tax Strategy

Elasticity of demand is a specific kind of measurement that deals with the measurement of the changes in the consumption pattern of a product in relation to the price of that product (Wadud, 2016).  

Figure 5: Price curve of the road transport fuels in the UK

(Source: Self-created based on government data from gov.uk, 2021)

From the above graph, it is clearly visible that the price of the road transport fuels has increased until Jan 2013. However, it has started to drop significantly after Jan 14 and an average decrease of fuel price can still be observed in 2021 as well. If the consumption pattern of petrol in the UK can be observed then it can be noted that with the increase of the price the consumption has decreased till 2014 (gov.uk, 2021). In 2005, total petrol consumption was 18.5 gallons while in 2014, it was 11.9 gallon. Diesel price has also followed the same trend as petrol but as diesel is cheaper than petrol its consumption has somehow increased even if the price is high (gov.uk, 2021). 

The price elasticity also reveals that not only the consumption pattern but the supply of the raw materials also impacts on the price of the road transport fuels. Lack of proper substitutes and proper supply of the product also increase the price of the products (Dunkerley, Rohr and Daly, 2014). Hossingeret al., (2017), have revealed that the elasticities of the fuel price can be increased up to four euros per liter. It is recommended that the pricing of the product be situational. Situational pricing strategy can balance the fuel price with the increased or decreased demand. As per the present price curve of the UK, it can be said that it is good elastic as price change causes change in supply as well as demand.  

The two main categories of road transport fuel; ultra-lowSulphur diesel and ultra-low Sulphur petrol are charged on excise duty of 57.95p per liter. Including VAT, the tax is 62% of the final price of petrol at pumps and 61% of the final pump price in the case of diesel (commonslibrary.parliament.uk, 2022). In the 1990s despite troughs and peaks the oil price had followed an increasing pattern but at the end of it the taxing policy had become unpopular (commonslibrary.parliament.uk, 2022). The council had proposed to change the tax rates when the prices were higher. As the UK has faced supply shortage the fuel prices have slightly increased in 2021. Therefore, the UK government is planning to reduce fuel duty as well as VAT by 40% for the next two years to stop the fuel price increase (petition.parliament.uk, 2022).  

7. Evidence based Analysis of Performance Issues on UK Road Transport Fuel

Fuel prices are directly proportional to the demands. If the demands increase and the supply of fuel areless, then the price is obviously going to be increased. The household disposable income of the UK household has increased by 2,3% by the end of 2017 (ons.gov.uk, 2018). Thus, it can be said that the affordability of UK households has increased. Thus, it can be said increased prices are not going to reduce demand much. 

In 2021, due to several global issues, the fuel crisis has hit the fuel market of the UK hard. Suspension of the competition law between the firms, introduction of the process of getting an HGV driver’slicense, and temporary closure of 23 petrol citations by British Petroleum has caused the shortage of transportable fuel in the UK (bbc.com, 2021). Priorities were set that which entity is going to get fuel first and which is going to get later. As the fuel shortage has sustained, fuel price has significantly increased in 2021. 

Due to the adverse impacts of COVID 19, the supply of oil in the pumps has been hampered to a big extent. Due to panic buying at the onset of the pandemic, the price of the fuel had slightly increased. However, the tank was filled and the lockdown was imposed, the total transport system had halted which had caused historically lack of demand for fuel in the UK (ons.gov.uk, 2018). As an example, it can be said that in 2020, the fuel price was 18.3% lower than the price in the same month of 2019 (ons.gov.uk, 2018). 

8. Final Summary

Road transport fuel keeps the transport system alive in any country. In the first part of the market analysis, the size, type of products, taxation strategy, regulatory environment of the UK road transport market has been discussed. In the second part, the trends of the quantity and price of fuels overtime of 15 years have been analysed. In the third part, different factors like COVID 19, fuel shortage which have affected the supply and demand of fuel in present times have been analysed. This market analysis also consists of price elasticity demand of transport fuels in the UK.