Britain's big five gasoline marketers have been cleared of price skullduggery in the wake of Iraq's Aug. 2 invasion of Kuwait.
While the U.K. industry's reputation was officially upheld by an Office of Fair Trading (OFT) investigation, any thought among the companies that criticism of their price policies would then subside were misplaced.
And from the companies' viewpoint the investigation had some unwelcome side effects. Although the OFT centered its inquiry on the downstream business, it branched out into the profitability of North Sea production and raised the question of windfall profits from offshore operations.
DOWNSTREAM PROFITS
The report from the OFT, the national watchdog charged with preventing anticompetitive practices, said oil companies did not appear to be generating excess profits downstream.
Gordon Borrie, OFT director general, reported to the government the reaction of Shell U.K. Ltd., Esso U.K. plc, BP Oil, Texaco Ltd., and Mobil Oil Co. Ltd. followed the pattern expected in a competitive market.
It was the gasoline marketers' second clean bill of health on price practices this year. Earlier the powerful Monopolies and Mergers Commission found the industry did not operate against the public interest.
Unfortunately for the downstream companies, those two reports have not satisfied many of their customers, Radio interviews at service stations immediately after publication of the OFT report recorded a high degree of skepticism among drivers and allegations of a whitewash.
It's a theme that has been taken up by the popular media, whose allegations of price gouging had been partly responsible for the official investigation.
The sting in the tail of the OFT report came in Borrie's contention that windfall profits at the production stage were not a result of any failure of competition and there was no case for further consideration under competition legislation. He added it was a matter of general public policy, not competition policy, whether steps should be taken to moderate price rises or redistribute windfall profits.
All five big gasoline marketers are major players in North Sea production and seem safe from the idea of subsidizing downstream prices with upstream profits because that would effectively squeeze independent marketers out of the gasoline business and violate competition rules.
OFFSHORE FISCAL REGIME
Greatest fear of the offshore producers is renewed tinkering by the government with the offshore fiscal regime. As Esso pointed out, the marginal 86% offshore tax rate, imposed in the early 1980s when prices exceeded $30/bbl, was a windfall profits tax by any standard.
The British government had boasted that its offshore fiscal regime is one of the most price responsive in the world. That formed the rationale for not reducing tax rates when North Sea prices plunged to $9/bbl from $28/bbl in 1986.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.