Crude awakening: Opec pumps up the pressure

Big Oil is beset with problems, and legal challenges have brought many majors before the courts.
Click to follow

Opec has spoken, the price of a barrel of crude oil is up again, and it looks like being another expensive autumn at Britain's petrol pumps. Some industry experts say it's the perfect recipe for the sort of fuel crisis that brought the country to its knees a year ago.

What the 2000 crisis convincingly proved is that Britain – both private and commercial – depends on its fuel supply in the much the same way it depends on water and electricity. The major question is whether that status means the fuel supply industry should have its own regulator.

True, oil is not, like the utilities, a recently denationalised industry in need of state-controlled checks on its behaviour, but nor are the financial services and that industry is deemed to require regulation. But the fuel crisis demonstrated the need for effective, transparent political intervention. The 2000 crisis fizzled and the country was lucky to get away with it. It might not be so lucky next time.

Leading the calls for a regulator is the Petrol Retailers' Association (PRA), an organisation that has consistently lobbied for the creation of a body with expert knowledge of the fuel industry, and with the powers to alter practices it sees as unfair. One of its principal criticisms of the Department of Trade and Industry and the Office of Fair Trading is that neither has a sufficient expertise where fuel is concerned.

For their part, the DTI and OFT believe that a fuel regulator would be unnecessary. The OFT makes regular reviews of the oil industry, and has given it a clean bill of health all along. So long as the OFT concludes that the industry is competitive, the DTI is prepared to let the industry rumble in its own way.

The oil majors share that view, pointing to their wafer-thin margins at the pump as evidence that competition in the industry is alive and well and forcing them to run the petrol retail side of their businesses at something only slightly above break-even.

But the number of groups in favour of having a regulator is growing fast, and it arises particularly from those further down the petrol food chain whose voices are just beginning to emerge from the legal arena.

What prompted the oil price rise last week was Opec's decision not to reverse a production cut it made earlier in the summer. Consequently crude is back above the $25 mark, and according to analysts at Crédit Lyonnais it could be back on the path to $30. But while this kind of volatility is the stuff of regular headaches for the majors, they are also under attack from within.

Shell, for example, has taken at least one legal blow recently and could be facing more. At the beginning of this year, a lone Shell forecourt manager, Stephen Fallon, took the parent company to court for misrepresenting profit projections to prospective franchise-holders.

Another Shell petrol station manager, Sheila Gee, has, in the words of one Inland Revenue spokesman, "opened a big can of worms" by seeking clarification on whether she should legally be viewed as self-employed or as a full employee of Shell. Her case revolves around the nature of the contracts that the oil majors draw up. Ms Gee and others signed up to become station managers under the belief they would be able to control what stock was sold from the forecourt shops – which tend to deliver greater margins than the fuel itself. It later turned out that Shell would also be controlling that.

Apart from her own case, Ms Gee has joined with 30 other Shell forecourt managers who are preparing to bring a case of breach of contract in November this year. "This sort of thing really shouldn't be happening at all," says Ms Gee, "It is crazy that this should all end up in long drawn-out court cases, but that seems to be the only way.

"A regulator or some sort of industry-specific body would be an answer – we could get this sorted out more quickly and without risking our homes by taking matters to court."

The legal wrangles are by no means unique to Shell. Esso is facing a legal challenge over its Tiger Token promotion scheme, and another group is understood to be preparing a case against the UK side of Total Fina.

"What all these cases have in common," says PRA spokesman Ray Holloway, "is that they are all bringing up problems that are running sores in the industry. With a regulator you would have a forum to get quick, expert resolutions to some of these before it all got dragged into court."

But the PRA and others have a far greater motive for calling for a regulator. They argue that, whatever the OFT says, the fuel industry is not run on even terms.

Since the fuel crisis, pressure groups such as Garage Watch and large independent operators such as United Petroleum, have identified a problem they refer to as "two-tier pricing". They accuse the majors of offering one wholesale price to their own branded outlets, and a higher one to the independents. As a result, independent operators are going out of business at a steady rate – the level was up to two a day in May this year.

"We are just keeping our heads above water. We need a regulator to intervene in this situation and, for a start, ensure that everyone in the industry be allowed to operate on margins that allow companies like ours to say afloat," says United Petroleum boss Paul Salvidge. While Mr Holloway and others see this as a good argument in support of a regulator, it has even wider implications. In his assessment of competition in the motor fuels sector, European Commissioner Mario Monti pointed out that: "In countries where independent operators have a significant presence [eg France, United Kingdom and Germany] motor fuel markets are more competitive than retail markets characterised by vertically integrated suppliers. Therefore it is important that independent companies have a real possibility to enter the market."

As Mr Holloway explains: "You have to take the long view on this. The OFT may find the industry competitive as it now stands, but the independents often act as price checks in the areas they operate – take them out of the picture and the majors have free reign to dominate even with the supermarkets playing a role. Put a regulator in place now to stop that happening."

But the majors remain staunchly against the idea of a fuel regulator. UK PIA, a representative body for the petrol industry, sees the concept as delivering only another expensive burden to an industry that is already weighed upon by a raft of taxes and other checks on its power.

But perhaps the biggest contribution a regulator would make to the fuel industry would be to give the fuel-buying public a sense that things are under control. Competition may be fierce in the industry but the majors themselves admit it is a sad day when they have to point to thin petrol margins to parry public outcry at bumper profits on the upstream operations. It is illegal for companies to cross-subsidise parts of their businesses, and the majors do not do it. Nevertheless, it is clear that it is only the good profits elsewhere that prevent shareholders objecting to the low margins on petrol.

Those in favour of a regulator argue that despite their objections, the presence of a regulator might get the public off the majors' back.

"The issue of a regulator has clearly got its pros and cons and it may take another fuel crisis to get any movement on the matter," says Mr Holloway, "for the PRA's part, we are just going to keep pressing away until we have some resolutions to the many issues hounding this complicated industry."