The Observer: Britain on course for lasting pain at the petrol pumps: The effect the disaster has had on prices at American filling stations will take time to hit the UK, but the storm is coming: Sunday September 4, 2005

Oliver Morgan

Katrina's effect on the oil price may have been short and sharp - pushing crude to a $72 peak on Tuesday before it fell back to $67 by the end of the week - but the impact on petrol prices shows signs of lasting longer.

Last week some Americans were already paying more than $3 a gallon for gasoline - $1.20 more than a year ago - and were being told that the figure could go well above that in the coming weeks.

Paul Horsnell, oil analyst at Barclays Capital, says: 'What Katrina has done is make an already tight gasoline situation far more serious.' He adds that this means 'a significant contribution from the demand side in terms of demand suppression and would appear to imply sharply higher ... retail prices for a period of some weeks.' In other words, drive less or pay more.

In the UK, where prices for unleaded fuel pushed through the 90p a litre mark early last month, the RAC was issuing similar warnings. A spokesman said: 'We are saying that £1 a litre for diesel and even for unleaded fuel is possible. We certainly expect that a rise is likely.' One major petrol retailer said: 'The assumption that prices will rise in the next week or so is a perfectly reasonable one.'

However, as both petrol retailers and motoring organisations point out, oil companies such as BP and Shell should not be blamed for this. 'The fact is that 75 per cent of the price of petrol at the pump is tax and goes straight to the exchequer,' says a spokesman for the RAC. That means that the element of the price exposed to swings in crude is around 30 per cent. This means that any increase is likely to be less marked at the pump as a percentage of the total, but also that companies are working on slimmer margins and will have to pass it on.

'We would not call a price increase profiteering,' says an AA spokesman. 'The fact is there is competition in the marketplace here, particularly with supermarkets, and they are usually looking to cut prices.'

UK petrol went above 90p on 7 August, thanks to the increase in crude prices on middle east worries. Ray Holloway, of the Petrol Retailers Association, says: 'I think it is likely that there will be another rise, but not immediately, probably next week. I would say that it will be somewhere in the region of 3p to 4p a litre.'

The reason for the delay is that the UK is not heavily reliant on US oil and gas. In addition, not all oil companies have passed on the increased costs to retailers. 'Last week Exxon was the first to pass on an increase to Esso, and we would expect that to be passed on in turn, in the coming days,' says Holloway.

Should it be? 'The fact is that the retailers make a 2.5 per cent margin on petrol sales,' adds Holloway. 'If they had to absorb the increase they would have to take it into that 2.5 per cent, narrowing profits further.'

The lag in the petrol price is reflected at the wholesale level. While crude spiked sharply early in the week, petrol prices maintained the upward movement well into the latter part - putting on 2.8p a litre on Tuesday and 4.9p on Wednesday. Before Katrina, the price was some 27.9p a litre, by Thursday it stood at 35.8p.

The difference reinforces the critical impact of the storm: it has knocked out a huge chunk of refining capacity - some 18 per cent, according to David Fyfe of the International Energy Agency - as well as crippling the country's distribution system. Thus it is the price of the products made from crude, rather than crude itself, that is likely to remain high.

This came at a time when the US refinery system was already operating at full tilt. Horsnell says : 'The key dynamic is the taking down of a significant tranche of refining capacity, which is likely to result in a significant cumulative reduction in the output of oil products. The price will come down when it is clear how long it will take to fix these problems.

However, Holloway believes the increase in petrol prices will be temporary. 'The storm came in August, when demand for gasoline was at its height. September is a very difference picture, and I would expect the price to correct itself.'

But while the problem at the moment is gasoline - and any capacity is being used to make it - this may have a knock-on effect on supplies of heating oil for the winter.

http://observer.guardian.co.uk/business/story/0,6903,1562186,00.html 

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