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.
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 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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