What now for petrol prices?

published 21 December 2005

The Buncefield oil depot explosion in Hertfordshire destroyed 5% of the UK's petrol stocks. Could this lead to a petrol price rise? Maybe, but the problems go deeper than that

What happened?

Emergency services rushed into action on Sunday as plumes of black smoke and flames rent the skies above Hertfordshire. The cause? A massive explosion at the Buncefield oil depot, so huge it was apparently heard in Holland and France. The initial blast registered 2.4 on the Richter scaler. At the time of writing, the fires are still burning, so firemen have as yet been unable to determine the cause. However, the most likely seems to be that sparks from an electrical fault ignited a large cloud of flammable vapour that had built up workers say they could smell petrol and were looking for a leak at the time of the blast. Once ignited, this set off a chain reaction that led to the blaze in 20 fuel tanks, each containing hundreds of thousands of litres of fuel 5% of the nation's petrol stocks in one of London's three main terminals.

How bad is it?

It was described as the biggest such disaster in Europe since World War II, but it could have been much worse. It happened so early on Sunday morning that casualties were low. The heat was so intense (600˚C to 1,200˚C) that many of the most toxic substances, such as benzene, were destroyed, and it pushed the clouds of thick, black, oily smoke straight up into the air, rather than allowing them to collect on the ground. Pipelines carry jet fuel from Buncefield to Heathrow and Gatwick, but both airports have enough fuel for now and time to organise supplies from elsewhere. The main problem airports face, according to BAA, is delays caused by the smoke.

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What's it going to cost to put right?

Early estimates put damage to the terminal at around £70m, though the reputational damage may turn out to be a little higher. The insurance industry seems confident that oil firms affected by the blaze Buncefield is co-owned by Total and Texaco will cover most of the bill. But while they can afford to pay for the damage, the news isn't so good for some of the area's smaller firms, some of which will struggle to restart trading again (see below).

Will we run out of petrol?

It's hardly surprising that the sight of all that petrol "going up in flames" sparked "a limited amount of panic buying", says Anthony Hilton in the Evening Standard. And don't be surprised if there is the odd delay in deliveries and a slight uptick in prices at the pumps. But these won't have much to do with the fire. No, the true causes of the "very real" problem faced by the UK fuel industry pre-date the fire, "and will continue long after it has been put out". The problem isn't so much with the Shells and BPs operating the major refineries, but with the 20% or so of the business that is still in the hands of smaller independent companies. It's these firms that in the past have forced the majors to keep their fuel prices low by undercutting them. But the high gas price now means that electricity-generating stations are starting to mop up the supply that the independents would otherwise take, hence pushing up prices.

Aren't firms supposed to stockpile fuel?

That's part of the problem. The strategic oil reserve, known in this country as the Compulsory Stocking Obligation (CSO), means refiners and wholesalers should hold a number of weeks' supply of fuel as a buffer in case of problems. The independents tended to meet the requirement by buying options on the stock of other suppliers. But the Department of Trade and Industry (DTI) now proposes to implement a post-9/11 EU ruling that requires the CSO to be doubled, which means they're unlikely to be able to continue to operate like this: the price of the options has already begun to soar. All this "risks putting independents out of business". This in turn would mean no real competition for the majors and could send the price of petrol soaring.

Is this resolvable?

The obvious solution is for a quasi-Government agency to manage our petrol stocks, buying and selling where necessary to make sure there are no sudden shortages. That is the way the Americans and the Irish handle it, and it seems to work. But so far, the DTI has vetoed this idea, perhaps to stop the oil stock going on the Government's books and inflating its borrowing requirement, says Antony Hilton. But the upshot is that there is now a real risk of making shortages worse and causing more price rises. If we hadn't seen this sort of "inept" behaviour from Government and Whitehall before, "you simply wouldn't believe it".

Who got hit by the fallout?

Local firms, rather than oil companies, are the ones really feeling the shockwaves from the Buncefield explosion. DSG International (DSGI), which owns Dixons, was forced to shut down its UK headquarters, next door to the depot, where 1,500 workers are based. The headquarters of IT company Northgate (NTG) were seriously damaged and are expected to be inaccessible for a year. Three of its employees were sent to hospital and early estimates put the cost at several million pounds. ASOS (ASC), the Aim-listed retailer, had to suspend its shares, close down its website and cancel orders as its warehouse headquarters were affected. And the main distribution centre of Waverley TBS, part of Scottish & Newcastle (SCTN), suffered severe structural damage. It expects losses to total around £10m.