Car Editorial - May 2010

Of the total annual motoring costs incurred by motorists, depreciation accounts for around 45%. Whilst many would acknowledge this as a necessary evil of car ownership, some would be little surprised to learn that the second largest ownership cost is fuel at approximately 15%, higher than insurance, servicing, tyres, and taxes.

In recent weeks the price of a litre of petrol climbed to 119ppl. This is within spitting distance of the all time record of 120ppl reached in July 2008 (see chart recording prices up to March 2010).

In July 2008 the market was suffering low retail demand and very high trade supply, forcing prices into a rapid decent. However, the other negative influence on the market was the high price of fuel. In the July Editorial we referred to the “growing trade buyer sensitivity to large engined cars of virtually any description” and that all cars “over 2 litres are looked at with caution”. Whilst accepting that diesel prices were still 13ppl higher than today, petrol prices are virtually matching this all time high reached in July 2008, and yet there is no visible backlash reflected in dealers’ trade buying activities.

The reasons for today’s higher prices are varied. The increase in VAT on 1st January almost directly equated to an increase of 2.5ppl. There was a 17% surge in the in the wholesale price of petrol between February and March with a smaller follow through to pump prices, and this was followed by a 1ppl increase in fuel duty from 1st April. Throughout the period of the last 12 months the depressed state of the pound relative to the dollar (oil is priced in dollars on the world markets) has maintained the upward pressure on prices.

Given this series of increases and the fact that the press has not been backward in reporting these various events, it is surprising that there has not been any kind of backlash from retail customers this time around. In fact, those sectors of the used car market that could be described as fuel inefficient appear to be thriving. The most obvious example is the 4x4 sector that has recorded price resilience not seen in any other area of the market. Luxury, exotic, and super-sports cars are performing less well, but still better than the bread and butter market.

The absence of an adverse reaction to record matching petrol prices can be put down to a number of factors. Firstly, there is less of the ‘feel bad’ factor that pervaded the economy and the market in the summer of 2008. At the time there was the added buying disincentive in the shape of the large VED increases planned for the following April.  Secondly, fuel prices have been increasing more slowly in recent months compared to the more dramatic increases seen just prior to July 2008. This suggests that the current high price of petrol may, so far, not have appeared on the radar of many motorists.

However, there is a good argument to say that used car buyers should give more consideration to fuel costs. This is because a used car purchase is an event that only takes place every three or more years. Therefore, it is not only important to consider fuel prices today but the extent to which prices may increase over this period of ownership. Of course, forecasting prices is notoriously difficult but we can single out those factors that will have a reasonable chance of coming to pass. For example, we know that the chancellor fully intends to add a penny to duty on 1st October, and a further 0.76p on 1st January 2011. We are also told that there is a commitment to the fuel duty escalator that will see pump prices rise by inflation plus 1p a litre each year between 2011 and 2014.

Then there are the factors that are more speculative but do have a reasonable chance of happening. We know that any new Government will need to raise taxation and the prospect of VAT increasing to 20% has already been mooted. This alone would add a further 2.5ppl to the price of fuel. Another suggestion is that a snap post election budget could include a duty hike of 2ppl. Neither is it likely that there will be much appreciation in the value of the pound versus the dollar for the rest of this year. This all comes before we mention the imponderable future increases in oil prices.

A reasonable conclusion is that fuel prices will significantly exceed  inflation in the coming years, how much depends on speculation. We should also remember any reform of Vehicle Excise Duty (VED) will become more financially onerous on cars emitting high levels of CO2 and, as we know, there is a direct relationship between CO2 and fuel consumption. In other words, a used car that does not have very impressive fuel consumption figures is likely to face, not only higher fuel bills, but a bigger hike in VED. In addition all of us will be under more pressure to display our green credentials and improve our carbon footprints in the coming years. So if the financial pain was not enough, we could have to face a greater degree of social responsibility for our actions.

Even though we expect used car buyers to choose more fuel efficient cars in future we would not be predicting the demise of the large 4X4, luxury, and exotic sectors. Many decisions will be based on the premise that the car will not necessarily be the principal method of transport and could represent the second, or third car, in the family fleet. This means that the desire for ownership will remain high, but that the annual mileage will reduce.

Footnote

It is worth noting the convergence between petrol and diesel prices since this time last year (see chart). If the objective is to reduce fuel prices, now is a very good time to buy a diesel car (we shall cover this is more depth in next month’s Editorial)