The easy way to stabilise petrol prices

Don’t you hate it that petrol prices go up when oil prices go up but they don’t come down when oil prices come down again?

Oil down 18%, petrol up 2%

Since April 8, the price of Brent crude has fallen 18% whilst the price of petrol in the UK has risen by nearly 2%. The oil companies blame the different on exchange rates but the £/$ rate has only moved a few percent.

Older analysis shows that there is a strong correlation between oil prices and petrol prices.

Photo: ksgr

Missing a trick

The oil companies seem to be missing a trick that could give them happier customers and increase their profits at the same time.

It is already standard practice for gas and electricity suppliers to offer fixed rate contracts to their customers. This gives the customer certainty but it comes at a price so the supplier will make more money from them over the life of the contract.

Should the oil companies do the same with petrol?

They could offer customers a fixed price for a period of time which would give certainty to the customer and also tie the customer into using the same supplier.

Problems

There would certainly be problems to overcome:

Customers would have to be locked into using a minimum amount of petrol otherwise they would use the fixed price if prices went up and just go to another petrol station if the price fell.

It would also be frustrating for customers to be paying a higher price than the one advertised at the pumps because they have taken out a fixed deal. Although this happens with gas supply contracts it is not obvious to the consumer as they do not get to see the price they would have paid if they had not taken the fixed price.

A better solution

An alternative is for the companies to offer what would effectively be an insurance against increasing prices. It could work like this:

The customer pays 10% of their monthly fuel bill to the petrol company each month. The company can then invest that in something that tracks the oil/petrol price. At the end of the month, if prices have risen then the customer gets their original money back, plus a bit more to cover the increase in prices. If prices fall in the month then they get their money back less a bit, but they will have saved money on petrol so overall they will be in the same position.

The company that runs this scheme will take a cut from all the payments to make its profit.

Clearly any company offering this scheme would have to carefully manage the risk and volatility in prices but there must be a way to offer fixed petrol prices to consumers.

What do you think?

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