It’s a hard story to avoid if you’re near a TV, website or newspaper. Yes, the price of oil continues to slide in a rather dramatic way. At the time of writing Brent crude is below $51 per barrel. It’s a new five year low and is resulting in rapidly reducing fuel costs and supermarket prices. For us consumers, it’s great news. More cash in our pockets and more spending power. However, as fuel and oil shows no sign of stopping it’s decent, there are issues growing on the sidelines which are going to become more important over the coming weeks and months.
Fuel can only drop so much
As most of us know, most of what we pay at the pumps is tax. A mixture of VAT and high Government taxes. Retailers make a small amount, say a few pence per litre, and the rest of the cost is made of the actual product. It is this main product cost which has been reducing, taking the overall cost of fuel down with it. However no other factors, like tax, like VAT and retailer margin have been going down. Therefore, even if oil crashed to as low as $20 per barrel, the cost of fuel would soon hit a floor.
To give you an idea as to where prices are now, and where they were at their peak, take a look at this graphic produced by www.petrolprices.com:
These costs were broken down when petrol was at 132.9p per litre and 137.9 per litre for diesel. Lets look at the petrol price. There is a product margin there of 47.8p. Petrol round here has dropped around 20p since then. So, take that 20p off the product margin, that would then be reduced to 27.8p. That is a significant reduction. And with oil price drops continuing, there is still quite a bit more to come off the cost of fuel.
But there is going to be a limit which we may start to hit soon. With the amount of tax involved and absolute requirement for companies selling fuel to make at least a few pence per litre margin, as well as the oil companies making money, then I can’t see petrol going much below 95p per litre.
Still, the extra saved each time we fill up is going to be very welcome!
Deflation becoming a real risk
On Wednesday, there is a real risk the Eurozone will slip into deflation. The last figures showed inflation was just 0.1%. But with shares and oil tanking, it’s expected that deflation will set in. That means prices of everything (on average) will start to drop, rather than rise. For consumers, this is good news, but should deflation stick around, financial markets and institutions will start to suffer, and that will eventually seep in to the wider economy.
We need to start really looking at deflation here too. At just 1%, inflation isn’t that high. Oil has dropped sharply, causing food and fuel prices to drop sharply too. When inflation figures come out for December, we can expect inflation to drop again. At this current rate, the UK could fall into deflation by the summer. As I said, for consumers this is good, and should provide a boost to the general economy for a while as we all have more free cash to spend. But it’s not a long term scenario we want.
Pressure on our industry prices
So here’s my industry perspective. The longer oil and fuel prices continue to fall, and if inflation turns to deflation, it’s going to become harder and harder for suppliers and manufacturers to maintain their prices. Currently there are layers and layers of price increases worked into matrixes to cover things like rising raw material costs and high fuel costs. Well, that environment is well and truly over now, and the more the industry’s installers and maybe even the general public understand this, the higher the pressure will be to pass on those savings down the chain.
This has to come from the very top of course. Systems companies, glass houses and hardware companies have to address this first. Only then can any potential savings be passed down the chain. Personally, I really hope the biggest companies in our industry address this. I think it’s going to be a growing issue this year in our industry.
On the plus side, the UK economy should have a pretty good 2015. Lets hope inflation and oil prices balance out. Long term, it is balance that is good for the economy, not massive swings one way or another.