Sunday 18 February 2018

Smart Consumer: Why the pain at the pump is getting worse with no relief on the horizon

John Hearne

Oil prices are up 75pc and firms and families are being driven off the road, says John Hearne

Petrol and diesel prices are now 75pc higher than they were three years ago. Based on three 50-litre fills a month, it's now costing the average family more than €250 to put petrol in the car, up from €142 in 2009.

To put it another way, every 12 days you're paying the equivalent of the household charge just to fuel your car.

When Arthur O'Hara was forced out of the gardai through injury, he started his own business. In travelling to meet clients, he estimates that he drives between 1,200km and 1,500km each week. Fuel is costing him nearly €1,000 a month more than it did three years ago.

"A thing like a holiday is totally out of the question," says O'Hara. "Fuel has, without a shadow of a doubt, taken a huge toll on day-to-day spending."

He's taken all kinds of measures to try and reduce his fuel bill. If at all possible, he'll take public transport. He got rid of his two-litre petrol car and got a 1.9 diesel, which is much more fuel efficient.

"I was always the kind of a guy who bled the speed limit," he says. "I liked to get from A to B as fast as I could -- without endangering myself or anybody else -- but now I just tag along, well below the speed limit. It helps you get maximum mileage per litre."

Shopping around is an article of faith. A list of low-cost petrol stations scattered about the country trips off his tongue and if he's heading somewhere unfamiliar, he clicks on the app on his iPhone. "When you're consuming a lot, it pays you to travel maybe 10km to 15km out of your way to get a place that sells it cheap."

Trading down isn't really an option for John O'Brien. He runs a fire sprinkler maintenance business and needs to run a commercial vehicle. He won't have his 2007 Mitsubishi Pajero paid off until later this year.

"When I bought it, diesel was less than 80c a litre. I would just pull into a garage and fill up the tank, then off I'd go until the red light came up on the dashboard." Back then, filling the tank cost €85. Now, it's just under €136.

I ask him if passing on those price increases to his clients is an option and he laughs. No chance.

During the good times, O'Brien employed two staff, but as oil prices rose and the hard times bit, he had to let them go.

"Your biggest problem all the time is cashflow. I used to have accounts for fuel, I don't have that any more because I'd rather just pay as I go. At least that way I know where I stand."

Conor Faughnan of AA Ireland points out that for the vast majority of us, the mileage we put in each week is inflexible. Yes, you can change your car or the way you drive, but changing the distance between work and home just isn't possible. If public transport were an option, we'd already be taking it. If carpooling were an option, we'd already be doing it.

"What disposable income is available to the household is now being spent on fuel," says Faughnan. "And cannot therefore be spent into the local economy, so what you hear is, 'I still drive to work and back because I've got no choice but we used to do a family takeaway once a fortnight. We don't do that any more.'"

And, of course, the high cost of fuel isn't just about pain at the pump. All goods incorporate the cost of their transportation in the price. In March, the CSO reported inflation up to 2.2pc, due in no small measure to higher oil prices.

But is there some reprieve on the way? Last month, Nick Butler, a former BP exec, wrote a piece in the Financial Times which caused something of a stir.

He suggested that the last three years of oil price inflation is -- wait for it -- a bubble, one which is about to pop. His central argument is that years of high oil prices have encouraged investment in energy alternatives in general and shale gas in particular.

Shale gas is a controversial fuel. The favoured method of extracting it is hydraulic fracturing, or fracking, a process which environmentalists vehemently oppose.

Banned in France, the first company to explore for shale gas in the UK suspended its fracking activity in Lancashire last year because it caused two minor earthquakes.

In any case, Butler argues that this fuel holds out the possibility of a collapse in the price of oil over the coming years. Unfortunately, however, it's hard to find anyone who agrees with him.

In March, the IMF predicted that oil prices could spike by 30pc if Iranian supplies are interrupted this year. They will be. In response to Iran's nuclear programme, the EU plans an oil embargo against Iranian products, due to kick in on July 1.

You don't have to search too hard to find a trader or investment analyst predicting crude oil at $200 a barrel within the year. The current price hovers around $120.

Daniel Tarling-Hunter is an economist with Euromonitor International. He reckons that Butler's thesis is flawed because, quite simply, you can't put shale gas into your petrol tank.

"We're expecting the price to continue to go up," he says. "There will be a certain level of substitutability between oil and gas, especially in developing economies, but in America, 70pc of oil consumption is based on transport and very little is used for electricity."

Then there's Japan. "They've taken 50 of their 51 nuclear plants offline and Japan is now a huge importer of energy." While the FT article suggested that the Japanese demand for oil would reduce as these nuclear plants came back online, Euromonitor believes that the Fukushima experience will live long in the memory.

"Japan is unlikely to favour nuclear for some time, and there's jitters in Germany about continuing with nuclear as well."

Jitters in Germany rarely bode well for the rest of us. But here's the thing. Oil prices are not all about the gulf or sanctions or fracking or Germans with jitters.

The Irish Petroleum Industry Association says that the 164.9c you pay for a litre of petrol breaks down like this: 73.29c for the petrol; 54.18c on excise duty; and carbon taxes come to 4.59c. The NORA (National Oil Reserves Agency) levy is 2c. VAT is 30.83c.

So while the petrol is 73.29c, the tax is 91.6c. The tax is 125pc of the oil price. And get this: when you pay VAT, you pay VAT not alone on the fuel but on the excise, the carbon tax and the Nora levy. You're paying tax on tax.

Sales of petrol and diesel fell by 8pc in 2010, then by a further 8pc in 2011. But despite the fact that fuel tax hikes have actually led to a fall in the revenue collected from fuel taxes, there's zero chance of any respite from government. Last month, Finance Minister Michael Noonan said that anyone who thought there might be a cut in fuel taxes was living in 'economic dreamland'.

Sounds like a nice place. Can't afford fuel to get there though.

Irish Independent

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