Fuel Protests and Petrol Prices

13th September 2005

Or: "The stabilising impact of the petrol tank"

Petrol prices are at record levels in the UK (£1 per litre or, in US dollars, $6.90 per gallon). Tax makes up 2/3rds of this cost, in the form of VAT and a special fuel duty. Later this week there will be "fuel protests" against the price of petrol, particularly aimed at the government with the aim of reducing the tax burden. However, the chancellor has ruled that out, and he has the support of green lobbies (see BBC story, right).

The last time this happened (2000) there were blockades outside major refineries, preventing tankers from delivering fuel. Petrol stations ran dry, with a detrimental impact on many who relied on their car for work. With this memory clearly imprinted in their minds, many motorists have been filling up their tanks to try and reduce the impact of the fuel protests this time.

Ironically, fuel shortages are not caused by a shortage of fuel; they are caused by panic buying. In normal circumstances, fuel is evenly spread throughout the supply chain, and there are contingencies at every stage to allow for normal fluctuations in supply and demand. Panic buying, however, upsets this balance and sucks all the 'contingency' petrol to the consumer end of the supply chain. As a result, it is possible for some of petrol stations to run dry. There is still the same amount of fuel in the supply chain, but it is all in the wrong place.

A saving grace is that motorists' fuel tanks have a small, limited capacity - typically around 50 litres. If there were panic buying of, say, food then consumers have the potential to store almost limitless supplies, thereby making it impossible for the wholesalers to meet panic demand. In the case of petrol, however, motorists fill up their tanks and perhaps one or two petrol cans, but are unable to buy any more. This 'upper limit' on panic buying ultimately has a stabilising effect, because it is something that the oil companies can plan for in their supply chain management.

Fuel blockades still have the potential to cause great hardship, but the impact of panic buying will be limited by the size of the typical fuel tank.

Background

BBC News:

"Chancellor Gordon Brown has called for a "concerted effort" by oil-producing countries to bring down prices - but is not offering to cut taxes on petrol..."