Why the supermarkets are suddenly able to sell us cheap fuel
After years of mounting pressure on motorists’ pockets, petrol prices have started to fall dramatically.
That’s because supermarket filling stations are now the latest front line in the battle for customers, with tit-for-tat price drops being announced by all the major chains.
But why are supermarkets suddenly starting to sell petrol so cheaply?
Supermarkets have always attempted to sell petrol at an attractive price per litre, opting for tighter margins in the hope that you will then go and spend lots of money in store. Many are actually prepared to make a small loss per litre in order to gain your custom.
It’s partly about convenience for their shoppers too. It makes sense for people who are short of time to do all of your weekly big shop – including fuel – at the same time.
Remaining competitive has been especially difficult for the bigger chains over the past year with the rise in popularity of the discount retailers, including Aldi and Lidl.
One reason why many of the major supermarkets have started to cut fuel prices is because it means being able to offer something Aldi and Lidl can’t. They don’t have fuel filling stations.
Aldi launched its first petrol stations in Austria five years ago but doesn’t currently have filling stations here.
Will that change? It’s unlikely, but if customers demand it, it’s possible.
Is supermarket competition the only reason that the price has dropped?
No. Behind the drop in prices at the petrol pump is a general fall in the cost of oil on the world markets.
The price of crude oil has dropped significantly in the past three months, falling from $100 dollars a barrel down to $85 per barrel, largely as a result of supply outstripping demand.
This coupled, with the big supermarkets’ desire to win shoppers back, means the price could continue to drop significantly over the next few weeks.
Why was it so high in the first place?
Oil prices fluctuate as a result of changing world events and other economic factors, including supply and demand.
If the big oil producing countries decide to reduce how much oil they produce, then the price of a barrel of oil goes up. There are constant high-level negotiations aimed at ensuring some kind of equilibrium between supply, demand and what people are prepared to pay.
Uncertainty caused by conflict and political upheaval in oil producing regions is another influencing factor, which is why so much emphasis has been placed on oil in recent military campaigns around the world.
Will the price get a lot higher again?
In the short term, it shouldn’t. But we should always be mindful of what’s going on around the world politically, especially in the oil producing countries.
Production of crude oil is currently far higher than demand.
Ironically, with the prices being so low, more people may begin to drive again, creating increased demand and a potential price rise as supplies run short again. Even so, pump prices are unlikely to reach the 2012 highs of £1.42 for some time to come.
It’s also worth bearing in mind that in the longer term, there could even be a situation where fuel companies have to offer prices which are attractive to motorists who are considering switching away from fossil fuels altogether.
Petrol producers might also have to compete with electricity producers, potentially giving the upper hand to the motorist once again.
How low will fuel prices go?
On 28th October, Asda announced it would be dropping the price of fuel by 2p a litre and the other big supermarkets quickly followed suit. Due to the petrol price war between the supermarkets, it is possible that prices could drop to around £1 per litre.
The last time the price was that low was in May 2009.
But here’s hoping.