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Early this morning Asda supermarkets announced that they would slash the price of unleaded and diesel by 2 pence per litre beginning Tuesday, 25 June. It appears that Sainsbury’s (LSE:SBRY), Morrisons (LSE:WM) and Tesco (LSE:TSCO) will immediately follow suit.
What was described as “a flurry of price cuts” is being promoted as big news by the UK press, with one source call it a “Petrol Price War.”
I have always been puzzled about why people get so excited about the constantly changing price of petrol. I still remember when gasoline in the U.S. was 25¢ per gallon – that was 1967. When it was announced that the price would be going up to something like 28¢, cars were lined up so that drivers could squeeze all the fuel they possibly could in to a 15 gallon tank. (I’m using a 15 gallon tank for easy math.) I found it, and I still do, to be absolutely absurd that people would wait in long lines to save a grand total of 45¢.
So, assuming my usual contrarian perspective, allow me expose the folly of this price cut news.
Let’s start with Asda’s Petrol Trading Director, Andy Peake, who placed a 2 pence price cut announcement on the scale of the British government suspending all taxes for the next decade. “We’re giving our customers the opportunity to fill up their cars with lower priced fuel, putting much needed cash back in their pockets. Our national price cap benefits everyone across the country, meaning that no-one filling up at Asda will be forced to pay a premium for their fuel because of where they live.” Andy, do expect me to believe that? This is nothing but a promotional pipe dream.
Let’s do some quick math before I expose the rest of the story. By my calculations, my proverbial 15 gallon tank would be roughly a 57 litre tank in Great Britain. Let’s assume that you fill your 57 litre tank once per week. Now let’s assume that you don’t make a practice of running out of gas before you fill your tank. I think it would be reasonable to say that the average person fills their tank when it is about a quarter full. That means that you would usually be adding about 43 litres to your take when you fill up. It doesn’t take a rocket scientist to calculate that 2 pence x 43 = 86 pence. That’s what you would save on a single fill-up. Multiply that by 51.7 weeks (I’m deducting Christmas and Boxing Day) and you will save £44.46 over an entire year in “much needed cash.” Frankly, I can’t see how £44.46 is going to help most people all that much over the course of the year.
Now, let’s look at the rest of the story by stepping into my time machine. Our first stop on our trip back in time is 02 May 2013. Before we take off, let’s take note that the 2 pence reduction schedule to take place tomorrow will cap unleaded at 130.7 and diesel at 134.7 per litre. Hang on! Here we go!
02 May 2013: The headlines in the newspapers read, “The petrol price war intensified on Thursday with four major supermarkets all unveiling further reductions ahead of the bank holiday weekend.” They all announced a 2 pence per litre reduction. This was supposed to result in a cap of 129.7 pence for unleaded and 134.7 for diesel. Andy Peake said at that time, “We’re pleased to be reducing the price of fuel yet again for all our customers. Our national price cap benefits everyone across the country, meaning that no one filling up at Asda will be forced to pay a premium for their fuel because of where they live.” That sounds eerily familiar.
It also forces me to ask the question, “How is the 2 pence 25 June reduction to 130.7 (unleaded) and 134.7 (diesel) supposed to be a savings on the cap of 129.7 and 134.7 less than two months ago?” I admit that I did not fare well in calculus, but I aced second grade math, and this just doesn’t sound right.
07 November 2012: The headlines read: “Asda leads petrol price cut. Sainsbury and Tesco soon follow suit, promising 2p off a litre of diesel and petrol at the station forecourt.” This time the cap would be 131.7 and 137.7. Okay. Sounds good. I wonder what Andy Peake had to say. Oh, there it is: “What the British economy desperately needs is fairer-priced fuel on a long-term basis.” Excuse me, Mr. Peake. What do you mean by “long-term?”
04 November 2011: Grab that newspaper. It looks like it’s the last one at the newsstand. There it is, right on the front page: “Supermarket petrol prices fall as Tesco, Morrisons and Sainsbury’s join Asda in price war.” Take a wild guess how many pence per litre the price cut was. It was 2 pence per litre! Once implemented it put the cap for unleaded at 128.7 and for diesel at 136.7.
So, let me figure this out. If we start at 04 November 2011 and leap forward through three 2 pence reductions, gas prices tomorrow should cap at 122.7 and 130.7. Let’s compare that against today’s announcement that promises a 2 pence per litre savings, capping at 130.7 and 134.7. I think I am beginning to understand new math. Three successive 2 pence savings have resulting in the price of unleaded petrol increasing by 2 pence over the last year and a half, and the price of diesel declining by only one-third of the total of the announced increases.
I’ve got to tip my hat to the supermarkets who have decided to bestow their blessings on all of us. I suggest that immediately after you fill your tank, you go to the bank and deposit the 86 pence you saved before someone steals it from you. Then again, I’m not so sure that a bank is the safest place to hide your new found 86 pence fortune. I’m still trying to figure out how you Brits will save 2 pence per gallon by spending 2 pence more.
