Learning objectives?
How does price affect demand of
petrol?
The main
factors affecting price of petrol are:
· the price of crude oil, refining
costs and profits
· Refining costs and profits
· distribution and marketing costs and
profits
· Taxes
Price of petrol varies a lot between countries and regions.
The main component of the total price is crude oil and it is roughly the same
for all the markets. The price depends on production volume and demand and also
many other factors. Refining costs has some variation, but it is not very
significant. Technology improves efficiency and can produce better products for
less money, but needs significant investments as well. Small markets sell in
small volumes and needs more profits to survive. Bigger markets can if they are
efficient sell with less profits, but stay competitive. The taxes is the factor
that differentiates markets the most, the amount of taxes people pay for the
petrol can be close to zero or even 75% of the price.
The price elasticity of petrol is fairly low. When prices
rise, people still need to get to work and to the supermarket. There are
assumptions how much a price-increase of 10% impacts the demand. In this case
in the US the demand decreases only by 2,6% or 5,8% in the long run.
It is also notable that a fall in demand does not affect
prices greatly. In 2014 in the UK when demand had gone down sharply prices went
up sharply. Sale of petrol could be seen a bit dysfunctional. When demand
drops, the production is also dropped and then price for crude oil rises. Also
in this case the dollar was expensive and when oil is traded in dollars it
affected markets such as UK using pounds.
The demand for oil is rising in the developing countries,
such as China. It pushes the demand, but the correlation between petrol-prices
is not that simple. In Europe for instance people drive less and petrol is
stockpiled in large quantities,
therefore it may be sold at a higher price despite current cheaper oil.
What keeps the prices down is at least in the UK a very competitive market
situation. When there is a lot of competition, it is good for the customer
because prices should stay at a reasonable level due to possibility to get the
product from a competitor.
How can a petrol station market their
service to customers?
A petrol
station is not making a lot of revenues from petrol, when it´s very competitive.
An owner must ensure there is other goods for sale that interests the consumer.
It is obvious that a consumer wants to visit a clean shop, where the pumps are
maintained and the overall impression is not dirty. Competitive pricing is also
very important, but one can very seldom be the cheapest by a large margin, so
it is more like something you have to be rather than a way of making money.
Good promotions if you fill your tank might be useful, serving tasty foods or
having groceries the consumer wants could work very well the get additional
profits. One thing that is often overlooked at petrol stations is as well
actually providing servicing and maintenance of cars, which might be a good way
to generate additional income.
How does price war affect the company
and the consumer?
The sale of
petrol is a highly competitive business. It has a lot to do with supermarkets
being more popular and small shops being forced to adjust to the situation. In 1992
petrol stations at supermarkets had a market share of 11%, but in 2015 it was
44%. It has forced smaller shops selling petrol to quit and during this period
the number of petrol stations have halved. This is a rather clear that competition
is fierce and only the strong will survive or have survived. Opening a petrol
station is not an affordable venture, it costs about 2 million pounds to open
one in the UK. When it´s a heavily competed business it is really hard to get
revenues and get an interest on the investment.
For the
consumer competition is a good thing. It keeps prices as low as possible, but
prices are not at all stable. Prices have been ranging during recent years from
under 1 pound per liter to almost 1,5 pounds per liter. In the start of this
year it was estimated that prices might drop to 0,90 pounds per liter, because
supermarket-chains like Lidle and Aldi are entering the business. They are
selling petrol for 5-8 p per liter excluding wholesale price and taxes. This
forecast has not materialized at least yet, because prices have stayed over the
1 pound limit per liter.
