Why have Petrol Prices not fallen in line with the price of Crude?

A colleague asked me why petrol (gasoline) prices in the UK have not fallen in line with the Crude Oil Price.

From the peak price of $145, crude oil is now around $45 per barrel, a fall of nearly 70%.

The prices we pay per litre of petrol has fallen only 25%

 

I did a quick calculation to show him that we have benefitted in full.

Pump Prices for Petrol (Gasoline)
£ Per Litre (Incl VAT) £ Per Litre (Excl VAT)
July 1.18 1.00
Dec 0.87 0.76
% Fall 26% 24%
£ change -0.31 -0.24
Crude Oil Price
$ per barrel £ per barrel £ Per Litre
July 145.00 72.50 0.35
Dec 45.00 30.00 0.14
% Fall 69% 59% 59%
£ change -0.20

The price at the pumps includes VAT (Value Added Tax). Until 1st December it was 17.5%, then reduced to 15%.

Since July the British pound has fallen from £1=£2 to £1=$1.50, partly offsetting the fall in the crude price.

 

 That the oil companies have had a small reduction in their margins. Extrapolating, if the cude oil price went to zero, the pump price would still be around £0.70p per litre (around $4 per US gallon). Most of this is due to taxation. This has increased by over 50% since the mid-1990s, when pump prices (with 17.5% VAT) fell below £0.50 per litre.

 

The margins of the oil companies may have reduced slightly, but are largely irrelvent to the calculation.

 

 

 

Learning from the Credit Crunch in the UK

Following in from my response to Brown Tries to Sugar the Medicine on Iain Dale’s Diary on 11th December.

 

The PM evades understanding the issues, as he is to some extent responsible. However, that responsibility is shared by many, including myself, who cheered on the cuts in interest rates in 2000 and 2001 to avoid a recession.

The independance of the Bank of England was irrelevent to the issue. The vast majority believed that after the dot.com bubble burst and then after 9/11 it was necessary to reduce interest rates significantly to avoid a recession. This worked, but only at the expense of creating a credit bubble, shown in this country both by the housing market boom, and being able to borrow on credit cards at 0% interest. In the US housing market, there was a similar event, with fixed rate mortgages being granted at very low interest rates.

To blame the financial intermediaries so

The only one of the commentators who comes close (in my view) to getting things right is “not an economist”

The PM not only followed public opinion as Chancellor, but also the most respected minds in the business, lead by Alan Greenspan at the Fed.

To blame the is financial intermediaries is nonsense. The structure in which they operated by created by the Central Banks, the oversupply of the cheap money is due to the Central Banks. They followed a consensus view, climbing a roller-coaster theat  was never going to slide.

 

THE LESSON TO BE LEARNT.

 

  Central banks must be dogmatically conservative and deaf to public opinion.

 

In so far as we know how the economy operates, it is always going to be tainted by the need to please public opinion and their elected representatives. Further, a can-do approach is more popular than one that says we are not sure, or maybe it could cause trouble. But collectively, we did not see this one coming. Therefore, we need to learn some humilty. A rule will not do, as they can be circumvented. Instead need to learn the conservatism of the former Bundesbank.

 

 

THE GORDON BROWN EFFECT

 

The impact of the Brown high-spend era was to run a budget defecit when the government should have been running surpluses. Whilst talking about prudence, Gordon Brown assumed that we had done away with recessions for ever. The most important change that he instigated was changing the rule

 

FROM :-

  “Balance the budget over the business cycle”

 

TO :-

  “A deficit only for investment”

 

The “GORDON BROWN EFFECT” in public finance, is the changing of the rules to suit the moment, whilst maintaining the perception of continuity.

Manchester rejects Conjestion Charge

At 12am today we found out the results of the referendum on the £2.8bn package. With 53% of the electorate voting in the postal ballot, 78.8% voted against the proposal. This is the comment just posted on Iain Dale’s Diary,

 

It is worth taking a look at what this means for government policy generally.

Greater Manchester Transport paid £10m to put the package together, along with £3m spent on publicity. A majority of local politicians were strongly in favour, with most of the rest sitting on the fence.

The package was a good example of how the government views policy. It seems to have been devised to justify a particular favoured viewpoint, so was going to be biased from the outset.

 

Criticisms are

1)  A forecast of increasing growth in Manchester, with many of the new jobs in the city centre.

2) An overestimation of the effectiveness of a congestion charge in moving people onto public transport.

3) A failure to look at the total costs and benefits of the move, including the time taken in travelling, or the interests of commuters from outside the borough.

4) Figures pulled out of the air, such as “30,000 jobs will be lost” or “only 10% of people in Greater Manchester will pay the charge”

5) The use of threats – it is all or nothing. I wait to see if the government really carries out that threat, or just waits a period and introduces the Metrolink – the big ticket item – piecemeal.

6) Failure to publicise the budgeted 5.5% annual increase in congestion charge revenues to 2041, or that it would continue long after the £1.2bn loan

 

We should look to the local politicians to recognize that they have gone way out of line with popular opinion, and learn from this.

 

My own view is, as a (slightly manic) Beancounter, is that we should have independent, scrutiny of policy proposals, to see if they are of net benefit to society. Maybe the revised proposals should go through this filter.

 

I should be pleased, but instead am saddened. The government has expended a huge effort on a policy that is not only flawed, but completely out of line with what people think. Local politicians who have strongly backed this scheme should reflect, and admit that they got the mood wrong. It is unlikely to much affect the outcome of the local elections, as most politicians backed the proposals to some greater or lesser extent, and few wholeheartedly opposed the package.

 

POSTED TO Iain Dale’s Diary on the same subject.

Depairing Liberal said a few hours ago.

 

“That’s right Iain, far better for everyone to sit in ever-growing traffic jams for longer and longer every night. The last thing we need in our cities is considerably improved public transport, cleaner air and healthier people.”

It is true that congestion charging supplies a solution in the short-term. The Manchester scheme relied on the congestion charge (average £3 a day) to reduce peak time traffic flows by 15-20%. With reduced traffic flows the traffic would speed up. Peak time traffic was estimated to speed up by 30% for cars and 12% for buses. The problem is that in London & Stockholm, peak-time traffic did decrease by this amount initially, but 2 years later it was back to the levels it was before the conjestion charge was introduced. As I explained on my blog, people adjust their expenditure to afford the more desirable option. In Manchester, this is travelling by car. In a wealthy country most people can adjust their expenditure to afford the £650 (average charge) to £1200 per year (maximum charge) by renewing their car less often, or by driving a cheaper vehicle (currently we do no have the cheapest vehicles possible – they do not sell. So there is plenty of room to go down market.) The public transport option is to spend much longer travelling, with the longest journey times in the worst weather (as fair-weather public transport users jump in their cars when it rains, or it is cold, as occasionally happens in Manchester) and much of the extra time spent waiting or walking.

But in Manchester, part of the solution was to implement some bus lanes on dual carriageways, such as the A34 (Kingsway). If a significant reduction was not achieved by the congestion charge, some congestion will get worse not better.

On the environmental impact, the worst pollution was caused by buses. Central Manchester around the bus terminus (Piccadilly Gardens) is the 2nd worst place in Britain for carcinogenic pollution. The best way to spend a few hundreds of millions would be to fit the dirty old buses with some sort of filters, or replace them with new ones.

The whole package was dotted with useful ideas, but in totality the costs far outweighed the benefits. It was a complex package where the authors did not consider the question “Does society as a whole benefit from this proposal?”

Just posted to Iain Dale’s Diary on the current crisis

Just posted the following is response to Brown Tries to Sugar the Medicine on Iain Dale’s Diary.

 

The PM evades understanding the issues, as he is to some extent responsible. However, that responsibility is shared by many, including myself, who cheered on the cuts in interest rates in 2000 and 2001 to avoid a recession.

The independance of the Bank of England was irrelevent to the issue. The vast majority believed that after the dot.com bubble burst and then after 9/11 it was necessary to reduce interest rates significantly to avoid a recession. This worked, but only at the expense of creating a credit bubble, shown in this country both by the housing market boom, and being able to borrow on credit cards at 0% interest. The only one of the commentators who comes close (in my view) to getting things right is “not an economist”

The PM not only followed public opinion as Chancellor, but also the most respected minds in the business, lead by Alan Greenspan at the Fed.

To blame the private banks is nonsense. The structure in which they operated by created by the Central Banks, cheered on by governments and the general public.

 

THE LESSON TO BE LEARNT.

 

  Central banks must be dogmatically conservative and deaf to public opinion.

 

In so far as we know how the economy operates, it is always going to be tainted by the need to please public opinion and their elected representatives. Further, a can-do approach is more popular than one that says we are not sure, or maybe it could cause trouble. But collectively, we did not see this one coming.

 

Gordon Brown to Raid Pensions (again)?

In one of his first acts as Chancellor, Gordon Brown raided the UK pension funds. Now as John Redwood MP points out, this might be happening again. 

Just Posted to John Redwood’s blog in response to this comment on 8th December

 

There is something else to be worried about pensions. With the government forcing down real interest rates, the returns on pensions will also go down. That is the pot accumulated to retirement will be much less (due to compound interest) and the returns that the annuity will give will be much less.

 

Those pension funds holding bonds will get a one-off boost every time the interest rates go down, but the impact of pension funds having to hold ever-larger quantities of their funds in near zero-return assets will create the following problems.

1) The pension deficits will balloon, just as companies see operating profits plunge with the recession. The government will have to nationalize the pension funds, to save the businesses.

2) Many people will try to put off retirement, just as the workforce is shrinking. The government will have to subsidize people’s pensions

3) Many financial institutions will be unable to meet existing annuity payments (if those funds are affected), so may offload this onto new annuity quotes, or ask the government to bail them out.

 

The general thinking that we should be lowering interest rates to near zero should be re-visited. With plunging house prices, and the prospect of losing their jobs, folks are not going to buy houses, or incur more debt at the moment. You are right, Mr Redwood in saying that we should reverse the VAT reduction early. However, along with a few spending cuts, this may be much too little, too late.

 

I would like to substantiate this view with a quick calculation.

How much will annuity rates be affected if the average return was changed. I did a quick spreadsheet calculation, looking at the annuity rates for a £100,000 lump sum for different rates of return.

 

I came up with this table.

 

    Return % Annuity % Income £
    1% 3.29% 3,287
    2% 3.71% 3,708
    3% 4.16% 4,159
    4% 4.64% 4,637
    5% 5.14% 5,142
    6% 5.67% 5,673
    7% 6.23% 6,226
    8% 6.80% 6,801

 

 

   

     The assumptions are listed below, but the basic point that I want to illustrate is that if the average long-term rate of return diminishes, then so will the average payout from the annuity. (The returns do not decrease as quickly, as an annuity eats up some of the capital each year.) If the weighting of lower-yielding, secure bonds is increased and the yield on the new bonds is decreased, then returns on annuities will decrease alarmingly.

In the long-term, if interest rates then go up after a few years of low rates and increasing proportions of bonds to equities, then the value of the pension funds will drop with the fall in bond values. This will more than offset the short-term boost that they got when the interest rates fell.

 

   The old fashioned method of resorting to the printing presses will come none too quick. According to Guido Fawkes the government is already laying the ground for this eventuality.

 

 

The assumptions are

1)     25 year assumed span.

2)     One payment annually and one fixed return at end of the year.

3)     Rate of return is constant.

4)     Income rises by 3% per year.

5)     Management fee of £200 rising by 3% per year.

Her Majesty’s Disloyal Opposition Commit Treason?

Comment just posted in response to this blog, at LabourHome to the idea that Her Majesty’s Loyal Opposition should be accused of treason for talking down the currency.

    To accuse the Tories of treason in talking down sterling would also imply that there comments are heard and taken into consideration. If I were a currency trader, the opinions of an opposition party I would not rate nearly as highly as specialist economists, respected journalists, the Chairman of the Fed, the IMF etc. Further, I would allow for some bias in their views.
    More importantly, I would base my judgements real factors, such as the state of the British financial sector, the current account deficit, or the ability of the government to steer the economy away from the rocks.
Is Peter Kenyon so in awe of the opposition that he believes their comments can be anything more than the splash of a small pebble against a Tsunami?

In brief, it is only a serious act of disloyalty if it has an impact. If nobody takes the oppositions comments seriously in their actions, it will have no impact on the course of sterling or the economy.

Follow

Get every new post delivered to your Inbox.

Join 34 other followers