Background
In response to fuel prices reaching unprecedented levels and resulting concerns that drivers are not getting a fair deal for fuel at the pumps in the UK, the then-Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng wrote to the CMA in June 2022 requesting both an urgent review of the fuel market, and a longer-term market study exploring whether the retail fuel market has adversely affected consumer interests. The notice of urgent review was published on 8 July 2022, and the market study launched alongside it, with the goal of examining the road fuel market in more depth, making full use of the CMA's compulsory information gathering powers. The CMA sought input from stakeholders in its invitation to comment.
On 6 December 2022, the CMA published its initial update report on the market study, alongside responses to its invitation to comment. It also confirmed that it has decided not to make a market investigation reference, which would have been a more in-depth and longer investigation in the sector potentially enabling the CMA to impose orders on and accept undertakings from stakeholders.
The Study's Findings
The report provides an overview of the work carried out so far, setting out analysis of fuel prices over the last 5 years, rather than just the 1 year covered by the urgent review. It considers in turn the road fuel value and production chain, and how prices and costs have changed across the value chain; the refining sector; wholesale supply; and retail markets.
Observations set out in the initial update include:
Prices
Petrol and diesel prices are no longer quite at the peaks observed at the start of the market study, but they have recently begun to increase again. The report notes that there has been an increased differential between petrol and diesel prices during 2022, due to a significant proportion of diesel historically coming from Russia, and therefore the supply shock associated with the Russian invasion of Ukraine having a greater impact on UK prices for diesel than for petrol.
Refining
Refining spreads hit a historic peak in the first half of 2022, but this episode was short-lived. The CMA is not concerned by UK refiners' profit levels; whilst refiners have earned higher profits than usual in 2022, they made lower than usual, or even negative, profits during 2020 and 2021. Price volatility at the pumps is likely to continue, reflecting volatility in refining margins due to global factors, rather than due to a reduction in UK refining competition. However, the CMA recognises the negative impact price volatility can have on motorists and states it will consider wider policy options for mitigating these effects in the next phase of its study.
Wholesale
The wholesaling of road fuel to retailers is carried out by refiners selling their own product, importers selling product from overseas refiners, or independent wholesalers selling product they have bought from UK refiners and importers. The CMA's investigation of this sector is still at an early stage, but they plan to analyse wholesaler margins in the next phase of the study. Beyond questions of margin, the CMA is also investigating issues relating to the general functioning of competition in the wholesale sector.
Retail and Supermarkets
The CMA suspects that retail margins have increased over the past 5 years, and plans to investigate further to understand to what extent these may be reflective of higher operating costs that are not included in fuel margins, temporary volatility in the global market or a longer-term weakening of competition that is not working to consumers' advantage.
The CMA observed pricing differentials between sites in different geographical locations, but these regional differences were relatively small. They also found that supermarkets price below non-supermarkets, with the presence of supermarket petrol stations in a local area exerting a noticeable downward pressure on fuel prices. The CMA plans to study the impact of recent supermarket merger activity to determine whether they had a noticeable impact on these competitive dynamics.
Next Steps
The CMA is inviting views from interested parties on the initial update report. Feedback should be provided by 6 January 2023. They plan to take this into account in the development of an initial findings report to be published in Spring 2023 and the final report with a statutory deadline of 7 July 2023. The final report will set out conclusions about the market and any remedial action the CMA feels is necessary.
It will be interesting to observe the analysis set out in the final report, given that the CMA promises to establish whether, and to what extent, competition problems are responsible for higher and more volatile fuel prices. Recommendations for remedial action could potentially impact stakeholders at all levels of the supply chain, and therefore we would encourage stakeholders - whether representing a business, organisation, local authority, or otherwise - to reach out to the CMA with feedback that will inform those next steps.
To respond to the consultation, you can email written submissions to RoadFuels@cma.gov.uk by 6 January 2023. To access further information on the market study, please click here.
If you have any questions about the market study or wider competition queries, and would like advice, please get in touch.
