Victims of record oil prices are to be found throughout the economy, and the identities of some are more obvious than others. The transport sector, such as bus operators and hauliers, is particularly hard hit. And jet kerosene prices have increased even more than diesel, eating into airlines’ profits and helping to send many smaller operators to the wall.
The price of oil also indirectly affects the price of gas, and, in this country at least, the price of electricity. Clearly, any business that runs a shop or office has utility bills to pay - as does every household. Utility bills have gone up by an estimated 85 per cent on average over the past five years, according to consumer group Energywatch.
The average annual gas and electricity bill stands at around £1,000, after suppliers increased prices by around 15 per cent earlier this year. And analysts are warning that suppliers like British Gas will increase prices again this autumn, this time by a quarter, because the price of gas on the wholesale market has shot up.
Record numbers of consumers, particularly the poorest and most vulnerable - pensioners, for example - are feeling the pinch. If suppliers go ahead with another round of price hikes this year, Energywatch is warning that 5.5 million households - more than one in five - will be living in ‘fuel poverty’. Such households are defined as those spending more than 10 per cent of their income on utility bills.
Adam Scorer, campaign director for Energywatch, says: ‘As utility bills have soared in the past few years, the issue has become one of the most pressing social and economic issues that consumers face today. It affects the health and wellbeing of millions of households and it reduces their quality of life.’
Apart from the social impact, it also means that consumers - already hit by massive food inflation - have even less money to spend in the shops, increasing the odds of a recession in this country as a result.
Bus operator Reading Transport, which runs 195 diesel-powered buses in and around the Berkshire town, has been hit hard by soaring fuel costs. Chief executive James Freeman says: ‘Because we aren’t as big as some of the major bus operators like First Group, we can’t buy fuel in such vast quantities. That means we are more susceptible to changes in the oil price.’ He is now considering whether to buy enough diesel to last from this October to October 2009.
If Goldman Sachs analysts are right, and oil heads to the $200 mark in the next two years, this would be a smart move. But only two weeks ago, rival investment bank Lehman Brothers was arguing that oil prices were 30 per cent overvalued because of speculation and that the ‘bubble’ would soon burst. ‘It could either turn out brilliantly or awfully,’ Freeman admits. ‘Fuel price risk has always been a big problem for bus operators. But the difference this time is that because prices are so much higher, so are the stakes.’
More worrying is his other motive for buying in future supplies: his fear that Reading Transport may run out of fuel. The recent strike at Grangemouth refinery in Scotland raised fears - which never materialised - that petrol forecourts could run dry, prompting panic buying by motorists. In an environment where fuel supplies are becoming tighter, you can understand the anxieties of Freeman and other executives. As he says: ‘A bus company without fuel is like a pig without swill.’
How to deal with runaway diesel costs now is the more pressing issue for Reading Transport. Freeman says that the company will almost certainly have to raise fares before the traditional annual September review date. This comes on top of a 5.5 per cent rise last September.
Higher costs also mean that the company may have to close some of its less used routes, such as part of its Newbury network. ‘Routes which were marginally OK become marginally not OK.’
Airlines, too, are struggling to cope. Last week, Easyjet announced that first-half losses had quadrupled because of its record fuel bill. The company said it would increase fares by almost 10 per cent unless oil prices fell significantly. James Hogan, the chief executive of Abu Dhabi-based carrier Etihad Airways, told The Observer that it had already bought in about 40 per cent of next year’s fuel requirements.
Last week, following a slight dip in kerosene prices, the airline’s traders took the opportunity to snap up 2 per cent of its fuel requirements for 2010. Clearly, Etihad Airways and Reading Transport have more in common than at first seems apparent.
Back in Oxford, Beecher says that because he is having to pay so much more on driving around the country, he has less to spend on buying and restoring secondhand instruments - unless he borrows more from the bank.
For many companies in the transport sector, fuel costs have become the biggest outlay. Kevin Plews, the owner of a haulage firm in Shropshire with seven trucks, says that, while last year his biggest overhead was wages, this has been overtaken by fuel, which now accounts for almost half of his costs.
Business groups such as the British Chambers of Commerce want the government to scrap the next 2p per litre rise in fuel duty planned for October to ease the burden for firms.
‘The government has got to look at this seriously before the country grinds to a halt,’ Plews says. ‘It’s not just the increase of diesel prices but the speed at which this is happening.’
He adds that it is becoming harder to pass on his higher transport costs to retailers, the principal customer of the haulage industry. ‘Retailers are loath to increase prices too much and slow sales,’ he says.
Last week, Next gave an indication of just how badly retailers were struggling with rising costs and weaker consumer spending. Like-for-like sales fell 8.9 per cent for the past three months, and chief executive Simon Wolfson warned that the slowdown could continue into next year because higher fuel bills and mortgages were hitting consumer spending.
UK-based retailers spend only about 2 per cent of their turnover on oil-sensitive distribution and transport costs, estimates Gavin George, head of retail at Ernst & Young. Another
2 per cent of turnover goes on heating and lighting shops. But with retailers operating on such slender margins, big increases on these relatively small costs eat into their bottom line.
Supermarket shoppers are already having to shoulder higher prices because of food inflation. George says that they are resistant to paying even more for the added cost of transporting goods to the shops, so retailers baulk at passing on these oil-related costs, meaning pain for suppliers and hauliers.
‘Shoppers seem to be more able to accept that a loaf of bread costs extra because the price of flour and wheat has increased,’ he says. ‘They may not accept so easily that a tin of baked beans costs more because the price of diesel needed to transport it to the supermarket has gone up.’
Ian Green, 50, from Leeds, is a member of one of the 4.5 million ‘fuel poor’ households in the UK. Recently made redundant, he lives with his wife, who receives disability benefit, and their daughter. When he starts receiving benefits, the couple will have a monthly income of about £500. Out of that, they pay their supplier Npower about £40 a month for electricity and about £10 per month for gas, but much more in the winter. They have pre-payment meters for their gas and electricity so they can keep track of their bills - even though the tariff is around a third higher than for those paying by direct debit online. The family do not have central heating, relying on a gas fire in one room and expensive electrical heaters in their bedrooms in the winter. ‘It’s another worry,’ Green says. ‘You have to budget well ahead of winter.’
The social impact of fuel poverty is hard to gauge accurately, particularly for people like Green. Adam Scorer of Energywatch says: ‘One of the problems is that for people on pre-payment meters, who are often the poorest customers, there is no way of knowing how much money they aren’t putting in because they can’t afford to. It’s not just how much people have to pay to stay warm, it’s those who have to stay cold because they can’t afford to keep the meter charged.’
It is difficult to estimate what proportion of household incomes is being spent on utility bills. Capital Economics last week said that the share of household income eaten up by unavoidable outgoings - like heating - had risen from 25 per cent to 31 per cent over the past six years. It added that there was little chance of this being reduced.
According to the Office of National Statistics, the proportion of the average weekly household budget spent on fuel and power halved between 1957 and 2006, from 6 per cent to 3 per cent. But this masks how hard the poorest are being hit by utility bills, particularly following rises since 2006, as, barring some government and token supplier hand-outs, rich and poor alike pay the same amount for their fuel.
According to Jonathan Bradshaw, professor of social policy at York University, the poorest 10 per cent of pensioners spent on average 18 per cent of their income on fuel bills between April 2006 and April 2007. The figure up to April this year is likely to be even higher. Over half of single pensioners are spending more than 10 per cent of their income on fuel - the definition of fuel poverty, he adds.
Mervyn Kohler, special advisor at charity Help the Aged, reckons that, of the estimated 11 million pensioners in the UK, a fifth are living in fuel poverty. Another 3 million pensioners are close to being plunged into fuel poverty, he adds. ‘Not since the 1970s have utility bills made up such a high proportion of pensioners’ average expenditure.’
He adds that the public’s impression that the majority of today’s pensioners enjoy a good standard of living is misleading. ‘The poorest ones are the ones you don’t see. You don’t see them chatting in restaurants or get stuck behind them driving slowly on the motorway because they don’t have the money to,’ he says.
It is well known that oil prices are rising to ever higher levels. But for businesses and consumers alike, the scale, speed and the impact of these extraordinary rises should not be underestimated.
And with little sign that oil prices will fall any time soon, it appears that high fuel prices - and everything that entails - are here to stay.
Original Source: The Guardian
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