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Fuel Security, The UK Energy Market

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The Price of Heat Fuel:

Over 90% of the variation in the average national retail prices of heating oil is explained by movements in the price of crude oil which in turn varies as a consequence of global events.

Price Trends
The chart shows average monthly prices since 2004. This of cial series goes up to February 2013 when the typical price hit a new high of 65.6 pence per litre. Prices increased from below 20 pence per litre in early 2004 to around 35 pence per litre in autumn 2007. The following price spike took the average to more than 60 pence per litre in summer 2008. Prices fell rapidly in late 2008 almost back to 30 pence per litre before increasing steadily throughout 2009 and early 2010. The earlier peak in April 2011 was still just below the summer 2008 level.
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 This series does not take into account short term or local variations in prices. For instance, the large reported price rises associated with the cold snap in late November and December 2010 are only partly re ected in this series. Daily averages reported show prices increasing rapidly to more than 70 pence per litre for much of early December of that year. The severe cold weather pushed up demand and led to general dif culties in supply and severe problems locally.
Both factors pushed up average UK prices at the time and led to larger than normal local variations in the short term. The typical mid month price on the of cial series was 50.2 pence per litre.
The Estimated Cost Of Heating A Typical Three Bed-House With Oil Has Been Second Only To LPG For Most Of The Past Seven Years.
In January 2013 the estimated national average cost of using oil for heating and hot water in a typical three bedroom house was just under £1,700 per year, compared to around £1,250 for gas.10 11
While the average cost of heating oil is almost 50% higher than mains gas, the cost of using LPG is almost double that of mains gas UK average heating oil and LPG heating costs have risen over the last four years, during which time LPG has been consistently the most expensive and heating oil has been the most volatile.
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Why Have Prices Increased By So Much?

VAT is charged on heating oil at the reduced rate of 5% since 1997. There is no duty on heating oil, so price changes are solely driven by changes in the pre-tax price. The main elements of the price of heating oil are the price of crude, the exchange rate, the difference between the cost charged by re neries for heating oil and the cost of crude12 and the costs and margins of suppliers in the UK. The price of crude is the main element; however it needs to be converted into Sterling to re ect the cost of the raw material in the UK. There will also be a lag between headline market prices (normally for delivery the following month), prices paid in the UK by re neries and delivery to oil suppliers.

The chart above compares prices paid for crude by UK re neries (in Sterling) with the earlier price series for heating
oil. They are presented as indices to help comparison. It shows that crude prices tend to be more volatile and ‘lead’ heating oil prices. There is some evidence of a relative seasonal increase in heating oil prices and an increase in the relative gap from early 2009. The two series have followed each other fairly closely
for much of the period. Directions of change have been very similar, although the magnitudes have varied. The spring 2011 increase in crude prices was noticeably steeper than the heating oil increase.

The price charged by refineries for petroleum products is not often the same as the price of crude. Most are more expensive but some, such as fuel oil, are cheaper. The differential re ects the different levels of demand for these fuels. There is limited exibility in the short to medium term in the amount of each type of product that can be re ned from a barrel of crude. This means their supply is effectively linked so an increase in demand for one product is normally linked to an increase in supply of all. This will, other factors remaining equal, increase the relative price of the in-demand products and reduces the price of others. This explains much of the seasonal variation in heating oil prices and why diesel is more expensive than petrol. The OFT found that for heating oil, there is a strong seasonal variation in demand, and after controlling for crude oil prices, retail prices do rise as temperature falls.
Industrial Fuel Price Trends 1992 to 2013
Average industrial electricity prices, including the Climate Change Levy (CCL), increased in real terms by 6.3 per cent between Q2 2013 and Q2 2014, whilst industrial gas prices including CCL decreased by 12 per cent in real terms. Over the same period, average coal prices increased by 2.0 per cent in real terms. Heavy Fuel Oil is not subject to CCL.
The inclusion of CCL increases the average price of coal by 5.3 per cent and the average price of electricity and gas by 2.8 and 3.5 per cent respectively in Q2 2014.
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