Background on oil
Oil prices are volatile primarily due to the fact that they are determined by the market forces of supply and demand. These forces can be influence by a range of factors; for example conflict in Middle Eastern countries could result in political insatiability that may disrupt supply chains. Likewise economic sanctions may be placed on certain countries, which limit supply and put upward pressure on prices. On the flipside, oil prices may fall when governments are pressured to consider ‘cleaner and greener’ options or when new oil wells are discovered. Consequently when we fill up at the pump, the price per litre is rarely exactly the same as it was last time. Companies e.g. petrol station owners and even consumers must factor in this volatility to ensure that profit and utility are maximized. Despite these short-term challenges, there are greater and perhaps more important issues to consider such as the options left for conventional refueling stations as the market changes to adapt to alternative energy in light of the 2040 UK ban on the combustion engine.
The Petrol Industry:
The demand for petrol can be considered relatively inelastic in demand since alternative technology e.g. electric cars and the charging infrastructure that this requires is not up to scratch yet and such projects/investments still remain expensive.
Therefore in the short term, petrol stations are somewhat protected by the fact that there are few suitable substitutes. 99% of trucks on the road use diesel engines and there are estimated to be only 200,000 electric cars on the road by the end of this year. However, this does not mean that petrol stations are ‘protected’ or shielded in the long run. In fact in 2040, when the UK introduces a ban on diesel and petrol engines, fuel stations will need to rethink their strategy to prevent becoming obsolete. Many consumers are likely to make the switch to such technology before the due date as the government rolls out tax breaks and offers trade in values in exchange for their combustion engine. Although this ban does not include hybrid vehicles the demand for conventional fuels will be extremely low and such stations will need to make an investment to cater for the new emerging ‘green’ market.
Moreover many brands e.g. Volvo are looking to move toward hybrid plug in vehicles by 2020 with highly efficient engines meaning fewer fill ups and thus lower revenues.
What can petrol stations do?
When even the boss of Shell says his next purchase will be an electric car, one could be forgiven for thinking the game is up for petrol stations.
The main stations in the UK include Shell, BP, and Esso together with supermarket providers and independent stations. In terms of ‘future proofing themselves’ shell seems to be ahead of the game. There are a variety of fronts that they have taken these being: Hydrogen, Electric and convenience services. Below are some examples of the ventures that have been undertaken/planned:
- Shell is part of a joint venture with Daimler and others to commercialise hydrogen gas for powering hydrogen fuel cell vehicles, which are electric cars that have a range nearer that of conventional cars than battery-powered cars. The Berlin-based joint venture has eight sites and plans to have hydrogen-fuelling pumps at 400 locations across Germany by 2023.
- There are areas where it’s clear that there is a growing demand for battery electric cars, particularly in California and parts of Holland, so they are working on developing supercharging technology.
- Shell is running trials in China to generate all the energy needs of a site from solar panel canopies.
- In today’s digitally connected on-demand economy, retailers must work harder than ever to attract customers. Almost every UK Shell station now has a Costa coffee concession and around 30 have a Waitrose store attached. There is a huge number of people coming to service stations who are not filling up their cars but instead are coming in to buy breakfast, to get a cup of coffee, to get their car washed. Their need for convenience retail is more frequent than their car’s need for fuel.”
- Shell sold 60m cups of Costa coffee last year. In the UK there are some Shell-branded stations that are already making more money from selling products other than fuel. With that in mind, Shell is experimenting with different ways of luring customers to its stores and encouraging them to spend more time there. The company has two sites in Bangkok that sell only V-Power, Shell’s highest quality fuel, alongside a luxury cafe. Each customer gets two attendants – one to serve them and one to service their car.
- Increasing the retail offering of service stations will become even more important as cars become more efficient, needing to refuel less frequently. This means that revenues from fuel will be on a downward path until the switch is made or revenues from non-fuel products take over.
- Shell is preparing to open Britain’s first “no-petrol” service station in the capital next year as part of its drive towards cleaner motoring.
- Later this year Shell plans to roll out high-speed electric vehicle charge points across a selection of its 400 UK service stations, allowing drivers to charge their electric vehicle batteries by up to 80pc in 30 minutes. The group is about to begin an 18-month pilot scheme to test what the forecourt of the future might look like. Service stations will be presented ambitiously as “retail destinations”, providing good quality food and coffee alongside high-speed Wi-Fi. The trial will also include collection points for online shopping deliveries to improve convenience and perhaps even the addition of a post office or pharmacy to “transform” into a retail hub rather than a traditional fuel station.
- Tesla, although a niche segment of the market has its own network of superchargers, meaning such customers may be reluctant to use other “inferior” charging stations. That said the network still remains small and these owners will inevitably have to use other stations.
- Other manufactures may develop their own charging networks e.g. BMW/Audi reducing the need to visit a ‘transformed station’ but instead to use the manufacturer’s network. That said, it is unlikely every manufacturer will build a network, rather they are likely to collaborate to prevent a misallocation of resources and focus and expanding the network as much as possible.
- Independent stations may struggle to invest and stay ahead of the game especially if they are slowly experiencing a fall in their revenues and cannot afford to make adequate investments.
- In the short term, the government may look to introduce a more hefty ‘carbon tax’, squeezing consumers further and perhaps forcing them to consider moving towards renewable options. This could drastically reduce profits for petrol stations owners from fuel sales.
- Apple, the first company to hit $1trn could launch the iCar within the next 5 years. Apple has a trend for disrupting the market e.g. the death of blackberry, and some rumors suggest that this car may be entirely powered by solar power eliminating the need for on route charging stations.
Overall it is clear that in the short term, conventional petrol stations are not going anywhere soon, in fact there have been a number of setbacks with alternative energy, together with the technical & ethical issues of driverless cars meaning that such a transformation to a new automotive market could take time. However with the 2040 ban in the pipeline, the clock is ticking and as we’ve seen in the past with the revolution of smartphones and social media, once technology takes off, there’s no looking back and only those that have read the market correctly will be left standing. The impact of this is not solely on petrol station owners but on the government. The Treasury stands to lose up to £20billion of fuel duty and VAT every year if retail sales of petrol and diesel evaporate meaning that it has less to ring-fence and put toward grants to help embrace this change.
- The Government is boosting its push to promote electric and driverless cars with a draft law requiring petrol stations across the country to install more charging points. Have do independent petrol stations plan to insulate themselves from the expected future changes to the market such as the roll out of electric cars following the 2040 ban on conventional combustion engines?
- How will they compete with the big players within the industry who have access to large amounts of capital to invest and embrace this new change? (Shell invests £1billion a year on renewable energy)
- Supermarkets now dominate the petrol-selling market – Tesco alone sells 15%. They often undercut their rivals on pump prices and sometimes run at a loss with the sole aim of attracting customers to their stores. If customers make a move towards electric vehicles it is likely Tesco and others will make large scale investments to ensure their customer’s can ‘shop and charge’. How will independent stations compete with this competition? Would they consider merging with other services e.g. post office/pharmacies?
- Finally, the Number of petrol stations has fallen from 14,000 in 2000 to 8,500 today. If new charging points become ubiquitous e.g. in every office, car park, supermarket, the future for such stations could look even more bleak. What could they do to ensure their profits remain in tact?