Where’s the consumer guidance on fuel prices?

There’s loads of discussion about the high fuel prices at the moment.  That includes the pain and protests that come from folks who find the high prices hard to cope with.   That there will be some of these crunches is not surprising, and fuel is a good example since production and usage are virtually inelastic in the short term, so correcting for supply and demand imbalances is mechanically bound to have large price movements.

What I find interesting in this case, and others such as food prices, is the lack of any useful guidance for ordinary people before these crunches hit.  This guidance would be very helpful in assisting consumers as they make high capital cost decisions such as the car to buy and how far from their work/schools they should live.

I have three specific things in mind here.  One is a fan chart for fuel prices very similar to the one the Bank of England does for overall Retail Price Inflation (See latest below or here for more info).  That would show people the core forecast that took account of things like emerging market consumption or base production.  It should also be adapted to show some specific scenarios in the good and bad outcomes – for example, the loss of one or two major fields or refineries in the bad scenario (I’m struggling to think of near-term potential good news scenarios!)

The second would be guidance on oil shock impacts – for example, that the time for supply side correction is ~5-10 years, and that 50%+ rises could be required to moderate demand.  It would need to be in a user-friendly format to help widespread understanding.  But, that would help people understand the cost to them personally of managing a shock, and to be able to make decisions such as the level of fuel efficiency they need from a car, or the amount they should budget for transport.  That is required separately from the first since the timing of a shock may not be very accurate a year or three out, but the scale is much more predictable.  And, it will help people avoid underestimating how big the shocks can be.

Lastly, a simple way of using the information to make decisions is required, since the guidance on probabilities needs to be turned into a decision.  Could be as simple as a web calculator that uses base information such as weekly mileage and car type and turns it into a cost model with probabilities that the running cost breaches a user defined level.

Of course, an alternative is to simply accept that corrections are painful, and live with it.  But, it doesn’t feel like it would be too large an investment to make to assist those who wanted the assistance.

Edit – there is an interesting article on oil pricing, showing how hard it is to forecast, at http://www.dallasfed.org/research/eclett/2008/el0805.html.  Interesting to note that this document includes information on future prices and how those move over time … but not on the sensitivity of the prices outlined above which would help make decisions (probably as the futures prices are not modelled, they are the real futures prices).

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2 Responses to Where’s the consumer guidance on fuel prices?

  1. Jim Pye says:

    Hi Greg,
    An interesting view but there is one aspect to the present debate that I find either confusing or an indication of mischievous fuel pricing. Not so very long ago I recall the price of diesel being 1-2p/litre lower than petrol but it is now 3-4p/litre higher. Whilst I don’t pretend to understand the science of refining I find it difficult to believe that there is a technical reason for this swing. Rather I think it possible that there is some opportunity pricing going on, and indeed some band-wagon pricing (crude price goes up so let’s put something on the top for ourselves!!!). Then of course there is the VAT question now reckoned to be yielding the Treasury in excess of £1 billion in extra revenue.

  2. Greg says:

    There is a technical reason – there is a shortage of ‘sweet crude’ that has lots of light fractions like diesel in it – pricing there is even higher than heavier crudes. Heavier oil can be cracked to make light fractions like diesel, but there is a lack of refineries that can do it. Beyond that, demand in emerging markets (e.g. China) is mainly for diesel. Petrol, however, is relatively not in such short supply. So, Diesel rises a lot, and more than petrol – the drivers are real, it’s not opportunity pricing. At the same time, the market for heavy fuel oil is much flatter, with more supply than demand.

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