2006 04 27 study oil prices transport en

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Analysis of the impact of
oil prices on the socio-
economic situation in the
transport sector

Final Report

Client: European Commission, DG TREN

ECORYS Nederland BV

ECORYS Transport (NL)
Consultrans (ES)

Rotterdam, 27 April 2006

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Table of contents

Executive summary

Introduction

1.1

Background and objectives of the study

1.2

Framework of the study and structure of the report

Oil prices and transport costs

2.1

The development of oil, fuel and energy prices

2.1.1

The development of the price of crude oil

2.1.2

The relation between crude oil prices and the price of fuel and
electricity

2.2

The relation between fuel prices, energy prices and transport costs

2.2.1

Introduction

2.2.2

Road freight transport

2.2.3

Road passenger transport

2.2.4

Inland waterways

2.2.5

Rail freight transport

2.2.6

Rail passenger transport

2.2.7

Short sea transport

2.2.8

Aviation

2.3

The relation between transport costs and transport prices

2.3.1

Introduction

2.3.2

Road freight transport

2.3.3

Inland waterways

2.3.4

Rail freight transport

2.3.5

Rail passenger transport

2.3.6

Short sea transport

2.3.7

Aviation

2.4

Conclusions on the relation between oil and transport prices

Impacts and reactions in freight transport

3.1

Reactions by providers of freight transport services

3.1.1

Road hauliers

3.1.2

Inland shipping companies

3.1.3

Railway operators

3.1.4

Short sea transport operators

3.1.5

Airfreight operators

3.2

Reactions by the users of freight transport services

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

3.2.1

The impact of transport costs on costs of production and consumer
products

3.2.2

Price elasticities

3.2.3

Possible impacts on modal split

3.3

Conclusions on the impacts and reactions in freight transport

Impacts and reactions in passenger transport

4.1

Reactions by providers of passenger transport services

4.1.1

Local public transport providers

4.1.2

Railway passenger transport providers

4.1.3

Air transport operators

4.2

Reactions of users in passenger transport

4.2.1

Reactions by car owners

4.2.2

Reactions by users of passenger transport services

100

4.3

Conclusions on the impacts and reactions in passenger transport

102

Reactions of other economic agents and governments

104

5.1

Reactions of transport equipment manufacturers

104

5.1.1

Car Manufacturers

104

5.1.2

Aircraft Manufacturers

110

5.2

Responses of political decision makers and other economic agents

113

5.3

Conclusions on the reaction of other economic agents and governments

118

Literature

119

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Executive summary

Background and goal of the study

This report has been written in response to a request for services in the context of the
multiple Framework Contract for Economic Assistance Activities (Lot 2) between the
European Commission (DG TREN) and a consortium lead by ECORYS. The aim of the
study is to provide a comprehensive insight in the reactions of different actors in the
economy (‘economic agents’) to such sudden increases, or price shocks, which have
occurred several times since the first oil crisis in 1973. In order to cover this broad scope
of the study the following questions were posed:

How have oil pric es developed and what were the consequences for the price of fuel
and energy used by the transport sectors and transport costs?

How do fuel/energy prices impact on transport prices?

What were the reactions of transport providers and users to such price shocks?

How did governments and other economic agents react?

Based on existing literature, market data and cost models ECORYS and Consultrans have
answered the above mentioned questions.

1. Relation between oil prices and transport costs

Development of price of crude oil

The price of crude oil is determined on the world market and is influenced by a great
number of economic and political factors. The figure on the next page shows the
development of oil prices in both nominal and real prices (corrected for inflation).

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure S.1

Development of crude oil prices in nominal and real prices (= corrected for inflation, prices 2005)

Development of crude oil prices, period 1970-2005

1970

1975

1980

1985

1990

1995

2000

2005

(in $/bbl.)

nominal price

real prices

Source: http://inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

The figure shows that in real terms oil prices were exceptionally high in the years 1980-
1983. Although high nominal price levels have been reached in subsequent periods, such
levels were still quite modest in real terms. Only now (2005) oil prices are approaching
previous levels again in real terms. The perception of oil prices by consumers and
producers can be quite different, though, since people tend to look at nominal prices
instead of real prices.

Energy used by transport sector

Of all energy used in the transport sector in OECD countries only 0.6% relates to
electricity; 99.4% consists of fossil fuels made from crude oil (see figure S.2). According
to Eurostat figures for EU25, the share of electricity and fossil fuels made out of crude oil
show a stable proportion on transport fuels throughout the period 1990-2003 - 2% and
98% respectively. Therefore, the price of crude oil will affect the fuel costs of the
majority of transport operators.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure S.2

Demand for energy in transport in Europe (OECD Europe + East Europe + Turkey) in ExaJoule and %, 2000

6,4 ; 36%

6,6 ; 37%

2,4 ; 14%

0,1 ; 1%

1,9 ; 11%

0,2 ; 1%

gasoline

diesel

jet-fuel

electricity

bunker-fuel

other

Source: IEA SMP model

The relation between crude oil price and energy cost of transport sector

The price of transport fuels has a clear and direct relation with the price of crude oil.
However, this rela tion is also influenced by other elements, like production and
distribution costs, taxes, duties and VAT. In particular the level of taxes and duties may
differ between countries and by transport sector, giving rise to differences in sensitivity.
The share of crude oil prices in the final transport costs varies per mode and transport
segment as well. With regard to the relation between crude oil prices and energy costs it
can be concluded that:

•

Due to the absence of taxation and low processing and distribution costs, the variation
in the price of crude oil more or less directly affects the fuel prices for inland
waterway transport, short sea shipping and aviation. In these sectors a doubling of the
crude oil price will result in a doubling of fuel costs.

•

In other sub-sectors (e.g. road transport; rail diesel traction), the relation is weaker,
due to processing and distribution costs and taxes and duties. Still the response of
prices of diesel and petrol to crude oil prices appears significant. Up to 40% of the
price of fuel is related to the costs of crude oil. Thus a doubling of the crude oil price
will result in 40% higher fuel costs.

•

As the supply of electricity is usually from a mix of fossil, nuclear and sustainable
sources, the relation between the pric e of crude oil and costs of electricity used in
transport is very weak. Electricity prices tend to be almost insensitive to the short run
increases in the price of crude oil, but in the longer run a relation can be discerned. It
appears that in the long run a doubling of the crude oil price may reflect in 15%
higher prices of electricity.

Share of energy costs and transport operating costs

Energy costs are only a part of the total transport costs. Thus, even if fuel costs are
sensitive to oil prices, this effect may be dampened by other cost elements. The role of
fuel costs in total transport costs of freight varies per type of shipment, distance,
occupancy rates, but also per country. For instance, in countries with high labour costs the
share of fuel costs in total transport costs will be lower than in countries with low labour
costs.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The following table shows the average share of fuel costs in transport costs, as well as the
estimated effect of a doubling of the price of crude oil on costs of moving freight.

Table S.1

Average share of fuel costs in freight transport costs

Sensitivity of energy

costs to crude oil price

Share energy costs in

total transport costs

Effect of doubling of

crude oil price on

transport costs

Road Freight

40%

20-30%

10%

Rail freight - diesel

40%

15-25%

10%

Rail freight – electric

15%

2-3%

Inland waterways

100%

10-25%

Short sea

100%

15-30%

Aviation

100%

15-30%

Therefore, short sea shipping, aviation and inland waterway transport are most affected
by variations in the price of crude oil, followed by road freight transport and rail freight
transport (diesel). The costs of rail movement with electric traction are far less sensitive
to the oil price.

Such relations have also been assessed for passenger transport:

Table S.2

Average share of fuel costs in passenger transport costs

Sensitivity of energy

costs to crude oil price

Share energy costs in

total transport costs

Effect of doubling of

crude oil price on

transport costs

Car

40%

25%

10%

Buses

40%

Rail – electric

15%

5-10%

Aviation

100%

15-30%

The costs of aviation are thus most sensitive to variations in oil prices. A doubling of the
price of crude oil is likely to increase aviation costs with 15-30%. Such an increase would
affect total passenger car costs with 10% (but may increase variable costs with 30%),
while bus and rail transport operations would become only slightly more expensive.

2. Transport costs and transport prices

Freight transport

There is considerable difference in the ability of freight transport operators to pass on
the higher costs of fuel to their customers. Whereas in aviation the practice of fuel
surcharges is widely used, such price revisions are to a lesser extent used in road
transport. In rail transport, where the impact of oil prices on costs is smaller, steps are

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

taken to introduce such surcharges. In short sea shipping the possibility to pass on cost
increases directly to customers is presently low and also in inland waterway transport this
is not a regular reaction, even though a large minority of operators would start negotiating
adjustments to freight rates.

Other options besides reducing profit margins and the introduction of surcharges that can
be used to absorb higher fuel costs are increasing load factors (in particular in road
transport), rearranging business as to make more use of cheaper labour (road transport),
or economising on fuel use (inland waterway transport) and other operating costs (all
sectors). In the longer run operators can influence their fuel use by shifting to more fuel
efficient engines (short seas, inland waterways) or higher capacity vehicles (road
transport).

The ability of transport operators to pass on the higher costs of fuel to their customers
strongly depends on the ir market power. The next figure presents an overview of the
relation between market power and the level of affection by oil prices.

Figure S.3

Relation between oil prices sensitivity and market power

The X-axes gives a relative insight in the market power of the operators. The Y-axis
represents the way companies are affected by prices. Small transport companies in road
(driver/owner), inland shipping (captain/owner) and short sea transport have substantially
lower market power than large companies (third-party logistics providers) and rising fuel
costs may be absorbed by temporarily reducing margins. From this figure it can be
concluded that road freight transport operators, inland waterway operators and short sea
shipping companies will suffer the most from price hikes, which is reflected in the low
profitability in these sectors.

Passenger transport

The various segments in public passenger transport operators are affected in different
ways by an increase of transport costs. As public transport (rail, bus, and tram) is

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

considered as a public service, fuel price increases are not directly translated into higher
user tariffs which rather follow inflation and income trends.

For airlines the situation is different, as they widely use fuel surcharges on the ticket
price, by which the higher costs of fuel can (partly) be passed on to the traveller. This
may in particular have an impact on the high elasticity demand segments of the market
(e.g. holidaymakers using low cost airlines).

3. Reactions by users of transport services

Customers of freight services generally appear to absorb the higher transport costs
caused by fuel price increases, for instance by passing them on to consumers. As
transport costs are generally a small part of production costs, in particular those of
consumer products, the impact on demand for products is limited.

For some sectors, like automotive and chemical sectors, high transport costs can be more
important. Although there are some cases of rearrangement of transport and distribution
operations, like automotive industries using rail transport or the regular container services
in inland waterway transport, it is difficult to find a direct link with fuel prices, even
though they might have played a role. Even so, the use of rail transport, which is least
sensitive to oil prices, has not risen considerably.

In other low value commodity sectors where fuel and transport costs matter, like sand and
minerals, there are generally fewer possibilitie s to change transport patterns to less fuel
intensive modes, as these commodities are already mostly transported by rail and inland
waterway transport. In such captive markets fuel costs increases may more easily be
passed on to customers, with the possible consequence of reducing demand for transport
services. However, many of such freight flows are fixed in the short to medium term, as
production locations cannot be changed overnight.

Transport operating companies will tend to buy more energy-efficient vehicles (busses,
airplanes, trains). More attention for cost awareness and fuel efficient driving behaviour
are also reactions that companies show in the middle and long term.

Generally , private car users accept to pay for the fuel price increases, even though the
share of fuel costs in variable car use costs is high. In this case there is a difference in
short-term and long-term reactions. In the short run car owners may cut down on less
necessary trips, i.e. those made from a recreational or social point of view. Such trips
usually have a higher price elasticity of demand than commuting or business trips, partly
because the costs of the latter can be in some cases passed on to the employer. Car users
may also change their driving behaviour to become more fuel efficient.

In the long term, car owners can decide to change their travel patterns by changing for
instance their commuting distance or buying more energy efficient cars. This can for
instance be seen from the increasing use of diesel fuel cars in the EU.

The next figure (S.4) presents how the various transport segments are affected by oil price
developments and how demand reacts to tariff increases.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure S.4

Relation between impact and price elasticity in passenger transport

The figure above presents only a qualitative and relative view. Within each segment the
elasticity can vary substantially. For instance business travellers will have different
reactions then social travellers, whereas captive travellers in rail transport (commuters)
will have other reactions to price increases then recreational travellers. Substantial effects
form oil price increases can be expected, though, in certain segments of air transport, in
particular those which are based on low prices. In other segments of the air passenger
sector (e.g. business travellers) the impact will be much lower, partly because of fuel
surcharges being a smaller part of ticket prices.

Reactions of governments and other economic agents

Transport equipment manufacturers have spent considerable effort in increasing fuel
efficiency of equipment, in particular in road and aviation. In passenger cars such
efficiency gains have been partly offset by higher vehicle weight and engine power,
partly as a result of higher functionality. The improved fuel efficiency of diesel cars
combined with lower prices of diesel in several countries has resulted in an increasing
market share of diesel cars in all EU countries. In aviation a substantial increase in fuel
efficiency has been realised. There is less evidence of such technological progress in
equipment in inland waterway transport and short sea shipping

The various oil price hikes have prompted governments to take both short and long term
actions. The long term actions generally focus on increasing fuel efficiency and
stimulating the development of new technologies, stimulating modal shift, etc. Short term
reactions include fuel rationing by some countries in the early seventies.
In particular in 2000 various pressure groups demanded compensation for high fuel
prices and many governments bowed to this pressure by granting fiscal compensation
(various countries), or holding back on planned excise duties increases. Only in a few

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

cases taxes and duties were reduced. In 2005 EU governments agreed to avoid such
actions at country level as response to demands from pressure groups.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

1 Introduction

1.1 Background and objectives of the study

This report has been written in response to a request for services in the context of the
multiple Framework Contract for Economic Assistance Activities (Lot 2) between the
European Commission (DG TREN) and a consortium lead by ECORYS.

This study is set around the question to what extent the transport sector and the economy
are affected by substantial (and sudden) increases in the price of oil on the world market.
The aim of the study is to provide a comprehensive insight in the reactions of different
actors in the economy (‘economic agents’) to such sudden increases, or price shocks,
which have occurred several times since the first oil crisis in 1973. As reactions can differ
for different modes, commodities and countries, the study looks at impacts for all (inland)
transport modes for both passenger and freight transport, highlighting differences
between Member States when and if relevant.

The Terms of Reference for this study have distinguished four elements:

•

An analysis of the composition of total transport costs for different modes and
Member States to identify the main elements affected by oil price variations

•

An analysis of the impact on different segments of transport users, on the short and
longer term, taking into account differences between passenger and freight transport

•

An analysis of the impact on different economic agents, including suppliers of
transport services, manufacturers of transport equipment, etc

•

An analysis of reactions by political decision makers

These elements have been slightly regrouped for this study, as follows:

•

Supply side of transport services market:

An analysis of the composition of total transport costs across transport modes and
member states; identification of the main variables affected by variations in the
oil prices, identification of the increase in transport costs as a result of oil prices.

The impact of oil prices on the behaviour of transport services suppliers
(transport companies).

•

Demand side of transport services market: the behaviour of users at short and
medium term (passengers, shippers, logistics companies).

•

Supply side of the market for inputs to the transport services: the behaviour of other
economic agents, including producers of transport equipment and labourers.

•

Market regulators: policy makers.

The main objective of the study is to, on the basis of concrete examples, gain a better
understanding of the impacts that substantial rises in oil prices have on producers and

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

users of transport services, as well as on other agents in the economy which are directly
or indirectly related to the transport services market, such as providers of inputs to the
transport sector, indirect users of transport services and legislators.

In order to meet this objective, ECORYS and Consultrans have produced the present
report on the basis of existing literature, market data and cost models. The next paragraph
describes the approach to this study and the structure of the report.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

1.2 Framework of the study and structure of the report

The scope of this study is broad in many senses:

•

geographically: it covers the entire EU, depending on the availability of data;

•

from an economic point of view: many economic sectors are directly or indirectly
involved;

•

from the perspective of the transport sector: all modes are included, passenger and
freight transport;

•

time span: it should try to obtain information of a period covering 35 years
(depending on the availability of data).

In order to cover this broad scope in an efficient and effective way, a well-structured
approach has been followed. Answers have been sought to the following questions:

How have oil prices developed and what were the consequences for the price of fuel
and energy used by the transport sectors?

What is the relationship between fuel/energy prices and transport costs?

How are increases in transport costs due to (shocks to) fuel/energy prices
incorporated in transport prices?

What were the reactions of transport providers and users to such price shocks?

How did governments and other economic agents react?

The structure of this report is based on the questions raised above. Chapter 2 covers the
relation between oil prices and prices of transport services (questions 1 to 3). Chapter 3
looks at the impacts of price shocks by users of freight transport, whereas Chapter 4 deals
with the reactions in passenger transport (question 4). The reactions of governments and
other economic agents are dealt with in Chapter 5.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2 Oil prices and transport costs

This chapter explores the first question of the Terms of Reference, the analysis of the
composition of the total transport costs in different modes in Member States. To this
effect the different steps between oil price and transport costs are explored.

First it will be focused on the relation between the crude oil price and the price of
energy used in the transport, being different types of oil products or electricity. There is
a direct relation between the price of crude oil and transport fuel, as crude oil is a main
basis for many transport fuels used. However, the taxes and duties levied on transport
fuels en electricity are levied by Member States governments and may thus influence the
relation between crude oil and energy costs. These differences between Members States
will be addressed. The relation between oil price and costs of electricity is (also)
dependent on the types of fuel used in generating electricity. Also this can give rise to
differences between Member States, as the mix of sources of electricity differ.

Secondly, it is analysed to what extent the energy costs influence the costs of
transportation. Besides energy costs, this analysis will take into account other main
components of transport, costs like the costs of labour and capital costs. As some of these
factors differ by country and level of economic development, differences between
Member States are quite relevant and will be highlighted.

Thirdly, it will be analysed to what extent and with what speed changes in transport
costs , in particular price hikes, are reflected in transport prices or tariffs. As transport
prices are not only based on the factor costs, but also on market conditions or government
intervention, the analysis will look into such conditions and how they allow or prevent the
reflection of transport costs in transport prices. It is also important to consider that, while
some transport markets are more local or regional and regulated, such as public transport,
others are truly international and competitive, like aviation or short sea shipping. Another
obvious division is between passenger transport and freight transport.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2.1 The development of oil, fuel and energy prices

2.1.1

The development of the price of crude oil

The price of crude oil is determined on the world market, and influenced by a great
number of economic and political factors, such as among others:

•

The global demand for energy

•

The availability of oil reserves and other energy sources

•

The production capacity of refineries

•

The rate of investment of oil producing companies

•

Economic and pricing policies of major oil-consuming countries

•

The production and pricing policy by oil producing countries (e.g. OPEC members)

•

The functioning of oil markets, including speculation practices

•

The political stability in oil producing regions (e.g. the Middle East)

•

The global political and economic stability

•

Natural disasters, hurricanes etc.

Since 1970, the price for crude oil has shown great variation. Prices started to rise
substantially after the first oil embargo of October 1973 and remained steady in the
second half of the seventies. Subsequently production levels fell in Iran, where a
revolution took place and tensions with neighbouring Iraq resulted in a war. The OPEC
countries raised their prices, the US halted imports from Iran, where US hostages were
taken. The production in OPEC-states was reduced further, leading to a historically high
oil price in 1982 and 1983.

Later on, when oil production was increased, the world oil prices sharply decreased, to
approximately the same level as 10 years earlier. In the period between 1986 and 2002,
oil prices remained more or less at the same level, with a short peak in 1991 and 1992,
caused by the tension between Iraq and Kuwait and the first Gulf war that followed.
When the OPEC decided to increase its production in 1998, the demand in Asia dropped
and Iraq resumed its production, causing the price of oil to decrease to a level of that
before the first oil crisis. These events lead to a decision by OPEC to cut back its
production. The demand for crude oil increased, leading to a steady increase of the prices
until 2001.

The September 11-attacks further weakened the economic development in 2001. The
global economy had already shown signs of economic downturn at the beginning of that
year. The attacks and the economic recession lead to a sharp decline in consumption and
in the demand for oil, and to fears of a major economic crisis. After OPEC and non-
OPEC countries diminished their production in 2002, prices started to rise again. Unrest
in the Middle East and in Venezuela in combination with the start of the second Gulf War
pushed the price further in an upwards direction in 2003.

Additional restrictions of the OPEC production, in combination with a growing world
demand lead to a further increase in 2004 and 2005. Hurricanes in the Gulf of Mexico in
2004 and 2005 and a very strong growth in world demand (by e.g. China) pushed the
prices even further up.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

As the above describes the increase in oil prices in nominal terms, ongoing inflation has
softened some of the price developments. Because, also the costs of labour and various
others products and services increased over time, softening the relative impact of some of
the price rises. The figure below presents the development of the nominal crude oil price
as well as the price corrected for inflation in US dollars between 1970 and 2005.

Figure 2.1

Development of crude oil prices in nominal and real prices (= corrected for inflation, prices 2005)

Development of crude oil prices, period 1970-2005

1970

1975

1980

1985

1990

1995

2000

2005

(in $/bbl.)

nominal price

real prices

Source: http://inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

The figure clearly shows that in real terms the oil prices were exceptionally high in the
years 1980-83 and are now (2005) approaching previous levels again. In real terms the
price of crude oil was relatively low between 1985 and 2003. Thus, whereas in nominal
terms the price of crude oil seems high in other periods of price hikes (in particular in
1990, 2000), in real dollar terms the price was lower than in 1973-74 and substantially
lower than in 1980-83 and 2005. The latter periods seem to be the most important price
shock periods in the period 1970-2005.

As the nominal prices show a greater variation, particularly in periods of relatively high
inflation, the perception of oil prices by consumers and producers can be quite different
from the above picture; people tend to look at nominal prices instead of real pric es. The
fact that oil prices were at a relative ly low level between approximately 1985 and 2000
will therefore not be recognised by many transport users, whereas the periods of (nominal
and real) price increases are much better remembered.

Another aspect of the oil price, of course, is the uncertainty introduced in periods of
nominal price hikes. As long as prices are relatively stable, consumers and producers will
tend to worry less on the future development of the oil price. However, as soon as
nominal prices shoot up both consumers and producers might take actions, just to avoid
the risk of having even higher costs in the future. It may lead to consumers reconsidering
their choice of car, producers reconsidering the vulnerability of their production and
distribution system to high fuel prices and transport costs.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The previous figure showed real costs in US dollar terms, since this is the currency in
which crude oil is traded. Due to fluctuations in the exchange rates to the dollar, the price
for crude oil in Europe might have been different. The next figure provides an overview
of the development of the crude oil price expressed in US dollars and in Euros, since
2000.

Figure 2.2

Crude oil price development in Dollar versus Euro since 2002

The figure shows that oil prices have increased less in the Euro terms since the end of
2002, due to the increased value of the Euro compared to the Dollar.

Based on the data described above, the following periods can be considered as periods of
oil price hikes in real terms:

•

1973/1974

•

1979/1981

•

2003/2005

In each of these periods the price of crude oil (more than) doubled in real terms in a short
period. In other periods of rising prices (1990, 2000) the increase in real terms was
somewhat lower. The other difference is that the price hikes in these years followed a
substantial decline of real crude oil prices.

Although the three periods have in common that the oil prices have increased
substantially in a relatively short time period, the macro-economic background of these
periods is very different, as has been described in the above. The macro-economic
structure of oil consuming and oil producing countries also differs substantially for these
periods. In the 1970s and 1980s the oil price hikes have lead to global recession, whereas
the chances of the present hike will lead to the same situation are lower, as hike is

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

demand driven and oil producing countries are spending the revenues. In general the
development of the Gross Domestic Product is much less related to the oil price now than
35 years ago, whereas the monetary policy is also much different now than in the 1970s
and 80s (See also Chapter 5).

2.1.2

The relation between crude oil prices and the price of fuel and electricity

The price of transport fuels (gasoline, diesel, LPG, kerosene etc.) has a clear relation with
the price of crude oil. But other elements are included in the price that users pay for their
fuel at the pump:

•

production costs (refinery)

•

distribution costs (transportation and insurance)

•

margins for the oil companies

•

taxes, duties and VAT

Whereas production and distribution costs are more or less given, and margins depend on
the level of competition, taxes and duties are set by governments. These may show much
larger variation than the three other cost items. In the next chapters this aspect is further
elaborated per mode and in Chapter 5, where the reactions of governments are described.

A part of the total energy demand in transport consists of electricity, as trains (partially),
metros and trams operate on this type of energy. The share of electricity in the total
demand for transport energy however is very limited, as is presented by the graph below.

Figure 2.3

Demand for energy in transport in Europe (OECD Europe + East Europe + Turkey) in ExaJoule and %, 2000

6,4 ; 36%

6,6 ; 37%

2,4 ; 14%

0,1 ; 1%

1,9 ; 11%

0,2 ; 1%

gasoline

diesel

jet-fuel

electricity

bunker-fuel

other

Source: IEA SMP model

Of all energy used in transport (17,6 ExaJoule) only 0,6 % is electricity; 99.4% consists
of fossil fuels made from crude oil (see figure 2.3). Eurostat figures show that of all
electricity produced in Europe, 2,7 % is used for transport. According to Eurostat figures
for EU25, the share of electricity and fossil fuels made out of crude oil show a stable

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

proportion on transport fuels throughout the period 1990-2003 - 2% and 98%
respectively. Therefore, the price of crude oil will affect the fuel costs of the majority of
transport operators.
The price of electricity is to some extent also related to the price of crude oil, particularly
when oil and Liquid Natural Gas (for which the price is directly linked to the crude oil
price) are used for electricity generation. When electricity is produced by burning coal, by
nuclear power plants or by more sustainable sources (wind and water), there is no direct
relation with crude oil prices

. As the supply of electricity is usually from a mix of fossil,

nuclear and sustainable sources, the influence of oil prices will exist, but to a smaller
extent.

The figure below shows how the price (with and without taxes) for electricity for large
industrial users in Europe has developed since 1990 compared to the price of crude oil.
The figure is based on average prices for those countries that are included in the dataset
available.

Figure 2.4

Average electricity prices for large industrial users (Annual consumption: 24 000 MWh; maximum demand: 4000

kW; annual load: 6 000 hours) (average for miscellaneous EU countries)

0,01

0,02

0,03

0,04

0,05

0,06

0,07

0,08

1998

2000

2002

2004

Electricity prices (Euro per kWh)

Crude oil prices (Dollar per barrel)

Without taxes

All taxes included

Crude oil

Source: Eurostat, 2005

It appears that the price of electricity including taxes is substantially less volatile than the
price of crude oil. Whereas the oil price hike of 1999/2000 apparently did not affect the
price of electricity, the most recent hike in 2005 seems to influence the price of
electricity. Nevertheless, the price rise of electricity is substantially smaller than that of
crude oil. Other factors are influencing the price for electricity as well: the liberalisation

High oil prices can lead to an increased demand for coal, which leads to an increas ed price for coal and thus electricity

produced by burning coal

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

in the energy market, the efforts to produce electricity in a less polluting way, the changes
of taxation regimes; emissions trading and the production mix.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2.2 The relation between fuel prices, energy prices and transport costs

2.2.1

Introduction

In order to obtain insight in the way oil prices affect the transport sector and other
economic sectors, the following line of reasoning is followed for the different transport
modes distinguished:

The price of crude oil has an impact on the costs of fuels and electricity, and thus on the
transport costs. Higher costs for transport operators may be reflected in transport prices,
depending on the market situation. The present paragraph (2.2) describes the relation
between fuel costs and transport costs for different transport modes, for passengers and
freight transport. Paragraph 2.3 describes the relation between transport costs and
transport prices.

2.2.2

Road freight transport

Relation between price of crude oil and diesel

The (nominal) prices of petrol and diesel have shown a pattern of movement similar to
that of (nominal) oil prices (see figure 2.1). The level of magnitude in the oil price
variation and the variation of fuel prices (diesel and petrol) differs significantly, though.
While the price of crude oil shows larger variation (between 40 and 150 in index terms),
the variation in the price of fuel at the pump is less than half this size (between 75 and
115). To understand the logic behind this, the composition of the final fuel price has to be
analysed. This is described in the next paragraph.

Development of

crude oil prices

Development of

fuel / energy costs

Development of

transport costs

Development of
transport prices

Development of

crude oil prices

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.5

Index of crude oil prices and real average EU15 prices including excise taxes and VAT of diesel and petrol

(weighted average leaded/unleaded) over the period 1980-2002 (January 1986=100)

105

115

125

135

145

155

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Index (1986=100)

Diesel Sales Price

Petrol Sales Price

Crude oil prices

Source: Centrum voor Energiebesparing (Dutch consultancy firm), fuel price data,2003

Breakdown of diesel cost structure

Assuming that refinery and distribution costs are similar, there are four basic components
of fuel price variations at the pump:

•

Crude oil price;

•

Exchange rate;

•

Fuel related taxes (excise duties

, value added tax);

•

Profit margin.

Of these, the profit margin will depend on the market situation in a particular country. If
competition is more intense, profit margins may be lower. Exchange rate fluctuations can
play a role, but in particular in recent years convergence has taken place between EU
Member States. The US dollar/Euro exchange rate has some effect, as shown above, but
this effect appears to have dampened nominal price increases, rather than sharpened.

Fuel related tax: excise duties

Fuel taxes and duties are a substantial component of the price of fuel at the pump. This is
particularly true when the level of taxes and duties is relatively high, as is the case in
Europe when compared to e.g. the USA. The level of taxation (i.e. comprising excise
duties, value added tax, environmental taxes, etcetera) is the component that determines
the final fuel price to a large extent, as is shown in the next figure.

Besides the excise duty on diesel fuel, some countries impose other fuel-related taxes and duties (i.e. environmental taxes,

stockpiling fees).

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.6

Fuel price and the share of excise duties per country, 2004

Latvia

Estonia

Luxemburg

Poland

Greece

Spain

Slovenia

Lithuania

Czech

Republic

Austria

Belgium

Netherlands

Ireland

Slovakia

Italia

France

Finland

Denmark

Hungary

Germany

Sweden

Norway

Bulgaria

Switzerland

Latvia

Estonia

Luxemburg

Poland

Greece

Spain

Slovenia

Lithuania

Czech

Republic

Austria

Belgium

Netherlands

Ireland

Slovakia

Italia

France

Finland

Denmark

Hungary

Germany

Sweden

Norway

Bulgaria

Switzerland

Excise duties

Pump price (excl. VAT)

Source: Transport in Cijfers 2004, TLN.

The above shows the situation for 2004. It shows that fuel prices may differ up to 100%
between the cheapest and most expensive country. A substantial part of this difference is
caused by huge differences in fuel related taxes (i.e. excise duties) levied in these
countries. The UK had in 2004 the highest excise duties in the 19 European countries in
absolute terms, while taxes and duties were about half this level in various other
countries. The figure also shows that the fuel price without taxes and duties differs
substantially, with relatively high costs in Bulgaria, Finland, Switzerland and the UK.

For the EU countries shown in the graph, the share of taxes and duties in the pump price
differs between 30 and 55%, meaning that other costs (crude oil, refinery, distribution,
margins) account for 45 to 70% of the pump price. In other words, taxes and duties can
range from 40% of product costs excluding taxes and duties to over 100% of product
costs.

Developments in fuel related taxes

Until 31 December 2003 fuel related taxes in the EU were governed by Council
Directives 92/81/EEC on the Harmonisatio n of the structures of excise duties on mineral
oils and 92/82/EEC on the Approximation of the rates of excise duties on mineral oils.
Since 1 January 2004 taxation of energy products and electricity has been restructured by
Council Directive 2003/96/EC of 23 October 2003 on Restructuring the Community
framework for the taxation of energy products and electricity . Referring to this Council
Directive 2003/96/EC, some countries are doing just the minimum to comply with this
directive, while others gradually increase excise duties on fossil fuels to stimulate
environmentally benign activities. At present, there are huge differences between
Member States excise duty rates on diesel. Various EU countries, both new member
states and two “old” member states, do not adhere to minimum rates in 2004 (see figure
2.7). Directive 2003/96/EC provides for a transitional period however for Member States

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

with difficulties in implementing the new minimum levels of taxation, provided that this
does not significantly distort competition.

Figure 2.7

Level of excise duties on diesel (€/litre) per country, 2004

Bulgaria

Poland

Latvia

Lithuania

Greece

Estonia

Luxemburg

Spain

Austria

Slovenia

Portugal

Czech Rep.

Belgium

Finland

Hungary
Slovakia

Norway

Netherlands

Sweden

Ireland

Italy

Denmark

France

Germany

Switzerland

U K

EU minimum level = € 0.302

Source: Transport in Cijfers 2004, TLN

The level of taxes and duties is not stable over time. During the period of decreasing oil
prices (first half of 1996 – first half of 1999) changes in pump prices in the different
countries were substantially less. Several EU countries used the decline in oil prices to
raise their fuel taxation level, sometimes very drastically as in the UK where excise duties
increased with around 30% in the period (see figure 2.8). Only Portugal lowered excise
duties, but this was mainly to compensate for an increase in the VAT rate from 5% to
17%. At the same time oil companies were reported to use falling oil prices to raise their
profit margins.

During the period of sharp increases in the oil price (first half of 1999 – second half of
2000) the absolute level of fuel taxes increased as well in many countries (see figure 2.8).
Only Italy and Portugal reduced the excise duties, in the case of Portugal to the minimum
set by European legislation.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.8

Diesel excise duties in the EU15, 1996-2000

B DK

D EL E F IRL I LUX NL A P FIN S UK

B DK

D EL E F IRL I LUX NL A P FIN S UK

Source: Eurostat, Directive 92/82/CEE, Commission Proposal COM (97) 30 final.

Although crude oil prices rose steeply (with 182% in USD/barrel in nominal terms)
between the 1

half of 1999 and the 2

half of 2000, the final increase in diesel prices

ranged only from 43% (Greece) to 13.6% (Portugal). The effect of this sharp increase of
oil prices on final diesel prices was thus relatively modest, due to the other components.
Figure 2.9 shows the impact of the various components in this period for several EU
countries. It appears that the variation in the price of crude oil is responsible for 25-60%
of the increase in diesel price. This effect is substantially softened by a reduction in
margins of oil companies. The effect was up to -60% and more than compensated the
effect of higher prices for crude oil.

Figure 2.9

Diesel price variation components 1999-2000

Source: International Energy Agency and European Commission (own calculations)

Share of fuel costs in total transport costs

Having looked into the relation between the price of crude oil and diesel, the next
question to be addressed is the relation between road freight transport costs and the price

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

of diesel. The next figure presents the composition of the road freight transport costs in a
sample of European countries.

Figure 2.10

Breakdown of transport costs (costs in €/km) for some EU countries (1999)

Source: Comitato Centrale per l Álbo / Transport in Cijfers 2004, TLN (modified by ECORYS)

In the countries presented the costs of a representative truck were around € 0,80 to € 1,10
per kilometre. The main components are labour costs, fuel costs and capital costs
(interest), together accounting for 80-90% of total costs. Of these, interest costs differ
least between countries, and labour and fuel costs most. Whereas in the Netherlands,
Italy, France, Germany, Spain, Greece and Austria labour costs are higher than fuel costs,
fuel costs are more or less equal to labour costs in Slovenia.

On average fuel costs, including taxes, represent between 20% and 30% of the running
costs of a road haulage business. As a proportion of total running costs, fuel costs
increase in direct relation to vehicle weight. As excise duties represents just under 60% of
the pump price for diesel fuel (excluding VAT) at maximum (i.e. Germany and the UK),
this duty accounts for between 12% and 18% of the running costs of a road haulage
business.

Labour costs of truck drivers diverge much more than fuel costs

As indicated labour costs and fuel costs are the two main cost items for road freight
transport. Figure 2.10 shows that labour costs may differ even more between countries
than fuel costs. Figure 2.11 shows that differences in labour costs across the EU are
significant and, given the date in figure 2.6, even more significant than differences in fuel
costs.

For example, in Latvia and Estonia (which are amongst the cheapest fuel countries) the
level of fuel costs in 2004 (€ 0.62/litre excluding VAT) is nearly 50% of the fuel costs in
the UK (€ 1.18/litre excluding VAT). In 2005 this gap has become smaller with the level
of fuel costs in Latvia and Estonia having increased (€ 0.85/litre excluding VAT) to
around 65% of the fuel costs in the UK (€ 1.30/litre excluding VAT). In contrast, labour
costs of truck drivers in Sweden, which is the most expensive country in that respect, are

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

almost four times higher than labour costs in Slovakia and three times higher than labour
costs in Poland (see figure 2.11)

Figure 2.11

Comparison of labour costs of truck drivers, 2005 (index Sweden = 100)

100

Croatia

Bulgaria

Romania

Slovakia

Hungary

Poland

Czech rep.

Slovenia

Spain

Denmark

Germany

Austria

Italy

Netherlands

France

Belgium

Sweden

Source: TLN, Transport in cijfers 2005.

Development in main components of transport costs

Both labour costs and fuel costs have increased considerably during the nineties and this
has continued up to now. The next figures present the increase in the most important cost
components for commercial road hauliers, fuel costs and labour costs.

Figure 2.12

Developments in labour and fuel costs in the Netherlands, 1991-2005

100

110

120

130

140

150

160

170

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

index 1991=100

diesel price

labour costs

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Source: Transport in Cijfers, modified by ECORYS.

For Dutch hauliers the increase in the fuel costs in the period 1991-2005 has been more
stronger than the rise in labour costs. The same holds for French hauliers which have seen
a considerable increase in their fuel costs too over the last decade. This is shown in the
next figure which presents the development in fuel and labour costs for both long distance
and regional freight transport in France in the period 1997-2005.

Figure 2.13

Developments in labour and fuel costs in long-distance freight transport in France, 1997-2005

Fuel and Labour Costs

in Long Distance Freight Transport in France

100

110

120

130

140

jan

v-9

jan

v-9

jan

v-9

jan

v-0

jan

v-0

jan

v-0

jan

v-0

jan

v-0

jan

v-0

jan

v-0

Fuel

Labour

Index 2000=100

Figure 2.14

Developments in labour and fuel costs in regional freight transport in France, 1997-2005 (2000=100)

Labour and Fuel costs

in Regional Freight Transport in France

100

110

120

130

140

janv-97

jan

v-9

janv-99

janv-00

jan

v-0

janv-02

janv-03

jan

v-0

janv-05

janv-06

Source: French National Road Comity (CNR).

German hauliers have even faced a more prominent increase in fuel costs compared to
labour costs over the last few years. In the period 1999-2005 labour costs rose with
around 16%, fuel costs however rose with more than 80% in the same period. The next
figure presents this sharp increase, considering the development in some other cost
components of road hauliers in Germany as well.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.15

Developments in labour and fuel costs in Germany, 1999-2005

100

110

120

130

140

150

160

170

180

190

1999

2000

2001

2002

2003

2004

2005

index 1999=100

labour cost

other cost

variable vehicle cost

overhead cost

fuel cost

Source: Statistisches Bundesamt (Wiesbaden); KRAVAG (Hamburg); Deutsche Bundesbank (Frankfurt),

modified by ECORYS.

A fourth example of diverging fuel and labour costs developments is presented in the next
figure. For Spanish haulie rs the share of fuel costs in total costs has increased with around
5% in the period 2001-2005, while the share of labour costs declined with around 1%
over the same period.

Figure 2.16

Labour and fuel costs as a % of total costs in road freight transport in Spain, 2001-2005

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

april 2001 april 2002 april 2003 april 2004 april 2005

october

2005

% in total costs

% fuel costs

% labour costs

Source: "Cost observatory of freight road transport" - since 2000 – Spanish Ministry of Development

Previous examples imply that the share of fuel costs in the total transport costs has
become more important.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Data to provide a similar comparison between fuel costs and labour costs for other
European countries is scarce. For 2004-2005 some information is available, which shows
that in this year fuel costs increased faster than labour costs.

Figure 2.17

Developments in labour and fuel costs across the EU, 2004-2005

100

120

140

change 2004-2005 (index 2004=100)

labour costs

diesel price

Source: BP/Transport in Cijfers 2004, TLN (modified by ECORYS)

This should, however, not lead to the overall conclusion that fuel costs are apparently
more important than labour costs for EU road hauliers. From the next figure it can be seen
that in Eastern countries with lower labour costs fuel costs have indeed a larger share in
the overall costs of road freight transport compared to labour costs. In Western European
countries with higher labour costs however the labour costs have a higher share in the
total costs compared to the fuel costs. The UK is the only exception here with a higher
share of fuel costs compared to labour costs. This is caused by the relatively high share of
fuel duties which are the highest in Europe.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.18

Labour and fuel costs in road freight transport 2004/2005

10%

15%

20%

25%

30%

35%

40%

45%

Belgium

Bulgaria

Czech Rep.

France

Germany

Hungary

Lithuania

Poland

Portugal

Romania

Spain

% of total costs

Fuel

Labour

Source: The Burns Report (November 2005) and "Cost observatory of freight road transport" - since 2000 – Spanish

Ministry of Development.

Finally the next figure shows the development in labour costs in 1997-2003 in various EU
countries. It shows that while the development in labour costs in the old member states
(EU15) is rather modest, for most of these countries the growth rate of labour costs is
around 20%, labour costs in some new member states (i.e. Czech Republic, Hungary and
Slovakia) have increased much faster.

Figure 2.19

Developments in labour costs across the EU

100

120

140

160

180

200

Austria

Belgium

Czech Rep.

Denmark

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Luxembourg

Netherlands

Norway

Poland

Portugal

Slovakia

Spain

Sweden

Switzerland

index 1997=100

1997

2003

Source: Institut der Deutschen Wirtschaft / Transport in Cijfers 2004, TLN (modified by ECORYS)

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2.2.3

Road passenger transport

Introduction

In the perception of the relation between oil prices, fuel prices and transport costs for car
users, it is important to distinguish between fixed costs and variable costs. Fixed costs are
related to the decision to buy a car, variable costs are related to the decision to use a car;
fuel costs are part of the variable costs, but are also affected by the choice of car. Fixed
costs and variable costs together are the total costs of use of a car. This section will
provide information on the role of fuel costs in both variable and total costs of cars.

Market data for bus companies are scarce, as they are confidential. However, a tentative
assessment has been made on basis of publicly available material. Taking into account the
personnel costs for public transport (driver, conductor etc) capital costs, overheads and
maintenance costs, it can be assessed that the share of fuel costs may be about 5 percent
of the total operating costs of bus companies.

Fixed and variable costs of car use

The variable costs of a passenger car concern fuel and maintenance costs. Dutch research
(AVV, 2004) on the development of car expenses shows that for an average passenger car
(15,000 km/yr) the fuel costs are four times the level of maintenance costs: fuel costs
amounted to € 117 and maintenance costs to € 30 per month. So fuel costs are by far the
largest item in the variable costs of a passenger car.

Whereas total variable costs were estimated at € 147, the fixed costs (depreciation,
interest, insurance, car taxes) amounted to € 330 per month. So, fuel costs amounted to
about 25 percent of the total passenger car costs (€ 477) per month, but to 80% of
variable costs per month.

Taking similar assumptions and relations as discussed before in the road freight transport
section, a 100% increase in price of crude oil may translate in a 40% increase in fuel
prices at the pump. This would increase variable costs of passenger car use by 32%. This
increase may be more important for the car user than the increase in total costs of car use,
which would increase 10%.

Breakdown of fuel cost structure

Due increases in taxation, prices of diesel and petrol have gone up considerably between
1996 and 2002. Especially in the UK prices of petrol and diesel have increased
considerably.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.20

Development of fuel prices - automotive diesel and petrol

Prices of automotive diesel in EU15 (1996-2002)

Prices of petrol in EU15 (1996-2002)

Source: Annual energy and transport review, December 2004, European Commission - DGTREN

As discussed in the previous section on road freight transport, fuel related taxes determine
to a large extent the fuel price at the pump. The next figure considers the fuel prices and
fuel taxes for the EU25. The figures show that the size of taxes (excise duties, VAT and
other taxes) on petrol is higher than on diesel (with the UK as only exception).

Figure 2.21

Share of tax and duty in fuel prices (diesel and petrol)

Pump Price of Diesel as at December 2005

100

110

120

130

140

150

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

Cyprus

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Malta

Poland

Slovakia

Slovenia

Euro per litre

Tax and duty

Price excluding tax and duty

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Pump Price of Unleaded Petrol as at December 2005

100

110

120

130

140

150

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

Cyprus

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Malta

Poland

Slovakia

Slovenia

Euro per litre

Tax and duty

Price excluding tax and duty

Source: European Commission, Oil Bulletin (modified by ECORYS)

Relation between prices of crude oil and fuel prices

Retail car fuel prices typically follow wholesale prices which, in turn, are driven by crude
oil prices. There is substantial literature on the transmission of positive and negative
changes in the price of oil to the retail price of petrol or diesel. The reason for the high
attention could be the fact that car fuel price increases affect many consumers.

The difficult part of the relationship is to identify when the change in retail car fuel prices
takes place with regards to the change in crude oil price and also the degree to which the
retail price changes with regards to the change in crude oil prices, i.e. ascertain if there is
price asymmetry. The notion that motor fuel prices react quickly to oil price increases and
slowly to oil price reductions is largely accepted among car owners and transport
operators. The levels recently hit by oil and motor fuel prices and the present uncertainty
in supply and reserve availability have contributed to reinvigorate the interest in the
asymmetric transmission of changes in the price of oil to the price of motor fuel.

In order to get a true overview of the existence of price asymmetry or not, a large
selection of position papers and articles from economic experts have been studied. The
problem of a different response to price increases and decreases is first considered in
Bacon (1991), where attention is paid to the U.K. motor fuel market. Biweekly data are
used for the period 1982-1989. The author finds that increases in the product price are full
transmitted within two months, in the case of price reductions an extra week is necessary;
changes in the exchange rate necessitate two extra weeks relative to product prices before
being incorporated in retail gas prices.

Again the U.K. is the country studied by Manning (1991), who instead looks directly at
the impact of changes in oil prices on retail prices. The data are monthly for 1973-1988.
The author found weak and non-persistent asymmetry in price changes, which are
absorbed within four months.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Kirchgässner and Kübler (1992) look at Western Germany for the period 1972-1989
using monthly data. The authors consider the response of both consumer and producer
leaded gasoline prices to the spot price of the Rotterdam market; they do so for two sub-
periods, before and after January 1980. The methodology adopted is very rigorous.
Briefly stated, the results show that, while long-run reactions are not significantly
different for the 1970s and the 1980s, there is considerable asymmetry in the former
period but not in the latter in the short-run adjustment processes. In particular, reductions
in the Rotterdam prices are transferred faster to German markets than increases.

Reilly and Witt (1998) come back to the U.K. market to revisit the evidence of Bacon
(1991) and Manning (1991) with monthly data for 1982-1995 and emphasising the role of
the dollar pound exchange rate and the potential asymmetries associated with it, in
addition to those of crude oil prices. The hypothesis of a symmetric response by petrol
retailers to crude price rises and falls is rejected by the data, as are changes in the
exchange rate.

Akarca and Andrianacos (1998) investigate the dynamic relationship between crude oil
and retail motor fuel prices during the last 21 years and show that, in February 1986, this
relationship had drastically changed. Since then, the results suggest that motor fuel prices
include higher profit margins, they are substantially less sensitive to changes in crude oil
prices, and are more volatile.

Brown and Yucel (2000) find that observed asymmetry between motor fuel and crude oil
prices is unlikely to be the result of monopoly power. They also claim that policies to
prevent an asymmetric relationship between motor fuel and crude oil prices are likely to
reduce economic efficiency.

Below are some interesting graphics from a study by Brown and Yucel. The first graph
illustrates their findings that gasoline prices initially raise sharply after the crude oil price
rises and then increase more gradually. In contrast, retail gasoline prices respond only
gradually to a falling crude oil price (graph B). The net effect is an asymmetric response
in gasoline prices (graph C). According to these graphs, retail gasoline prices respond
more quickly when crude oil prices are rising than when they are falling.

Figure 2.22

Changes in oil price versus changes in fuel price

Graph A: Oil price rise versus fuel price rise

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Graph B: Oil price drop versus fuel price drop

Graph C: Net effect

Source: Gasoline and Crude Oil Prices, Stephen P. A. Brown and Mine K. Yücel

Asplund et al. (2000) investigate the Swedish retail market. The data are monthly and
cover the period 1980 through 1996. There is some evidence that in the short-run prices
are stickier downwards than upwards. Also, prices respond more rapidly to exchange rate
movements than to the spot market prices.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.23

Frequency distribution of price adjustments in the Swedish retail market

Source: Asplund et al., “Price adjustment by a gasoline retail chain”

Borenstein and Shepard (2002) propose a model with costly adjustment of production and
costly inventories, which implies that wholesale motor fuel prices will respond with a lag
to crude oil cost shocks. Unlike explanations that rely upon menu costs, imperfect
information, or long-term buyer/seller relationships, this model predicts that futures
prices for motor fuel will adjust incompletely to crude oil price shocks that occur close to
the expiration date of the futures contract. Examining wholesale price responses in 188
motor fuel markets, they also find that firms with market power adjust prices more slowly
than do competitive firms, which is consistent with the model.

Bettendorf et al. (2003) analyse the retail price adjustments in the Dutch motor fuel
market. They use weekly price changes for the years 1996-2001. They construct five
datasets, one for each working day. The conclusions on asymmetric pricing are shown to
differ over these datasets, suggesting that the choice of the day for which the prices are
observed matters more than commonly believed. In their view, the insufficient robustness
of the outcomes might explain the mixed conclusions found in the literature. They also
show that the effect of asymmetry on the Dutch consumer costs is negligible.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.24

Rotterdam Spot price for premium unleaded gasoline versus Dutch retail prices

Source: Bettendorf et al. (2003)

Galeotti et al. (2003) re-examine the issue of asymmetries in the transmission of shocks to
crude oil prices onto the retail price of motor fuel in European gasoline markets. In
contrast to several previous findings, the results generally point to widespread differences
in both adjustment speeds and short-run responses when input prices rise or fall.

Finally, Kaufmann and Laskowski (2005) analyse monthly data for the period January
1986 – December 2002. Their results suggest that, when utilisation rates and the level of
stocks are included in the model, the asymmetry between the price of crude oil and motor
fuel vanishes.

In conclusion it can be said that findings vary across countries, time periods, frequency of
the data, markets and models, but in general they fail to provide strong evidence that fuel
prices raise faster than they fall.

Other EU countries

As fuel costs are the main part of variable costs, the other being variable maintenance
costs, it is clear that in other EU countries the share of fuel costs in variable costs will not
be very different from the level found in the Netherlands. Differences will be caused by
the type of fuel used, the level of taxes and road use charges, and the level of maintenance
costs, which partly depends on labour costs. However, such differences are not likely to
affect the conclusion that fuel costs are the main part of variable costs of passenger cars.

The impact of fuel on total costs of car ownership and car use may be differ more, as the
Netherlands has relatively high purchase taxes on cars. Table 2.1 shows the current sales
or registration taxes in the Member States of the EU-15 and Norway. Five Member States
do not enforce any tax on car sales other than value added tax (VAT). Member States that
tax the acquisition of cars have very different systems of taxation. Several of them have
differentiated their taxes for differences in fuel consumption or factors that indirectly
affect fuel consumption (such as cylinder capacity, power rating and vehicle weight).
Some of them use progressive rates.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Table 2.1

Taxes on acquisition of passenger cars (sales or registration tax) in EU15 and Norway

Source: ‘Reducing CO2 emissions from new cars’, Per Kågeson, T&E, Stockholm, 2005.

As a result of different taxes on the acquisition of passenger cars, the prices of new cars
are relatively high in Denmark and Greece and, to a lesser extent, in The Netherlands,
Ireland, Finland and Portugal. Together they account for approximately 7 per cent of the
car market of the EU-15. Of the four large Member States, representing 73 per cent of the
market, France, Germany and the United Kingdom do not tax registrations at all, and Italy
has an insignificant tax rate of 2 per cent

Thus, there may be more variation between countries as to the decision to purchase a car
and, if so, to what kind of car (fuel efficiency, type of fuel). This will be elaborated upon
in chapter 4.

2.2.4

Inland waterways

Introduction

Inland waterway transport is used substantially in only a few EU countries in Europe (i.e.
Austria, Belgium, France, Germany, Hungary, The Netherlands). The navigation
conditions on the Rhine, Danube and others are to some extent regulated by international
treaties, which have an impact on the way in which fuel costs translate into transport
costs.

Relation between price of crude oil and gas oil

The price of gas oil, the main fuel source for inland waterway transport, has shown a
pattern of movement similar to that of oil prices (North Sea Brent) (see figure 2.24). The
development in crude oil price since 1999 reflects in the price of gas oil, which almost
tripled since 1999 (see figure 2.21). The relation between crude oil and gas oil is thus
substantially stronger and direct than for road transport.

Source: ‘Reducing CO

emissions from new cars’, Per Kågeson,

T&E, Stockholm, 2005.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.25

World market prices (in US$/ barrel) Gas oil and Brent crude oil over the period 1996-2005

Gas oil and Brent crude oil

(World market prices US$/barrel)

1996

1998

2000

2002

2004

US$/ Barrel

Gas oil (US$/ Barrel)

Crude oil Brent (US$/ Barrel)

Source: CBS The Netherlands

Figure 2.26

Development of gas oil prices (€ / 100 L)

Source: CCNR

The branch organisatio n for Rhine and inland navigation in the Netherlands (CBRB)
offers its members a ‘gas oil circular’ which presents a weighted average gas oil advice
prices from the oil companies, that the individual members can use in their negotiations
about transport agreements and gas oil clauses. In 2005 CBRB has compared this
weighted average advice price with the gas oil index on the International Petrol Exchange
(IPE) in London for the period 1997-2004. It was concluded that the advice price closely
follows the development of the IPE gas oil price. The weighted average advice prices is €
10/100 litre above the IPE price, because the IPE price is the trade price and the mix
advice price is the price of the delivery of gas oil to the end users.

jan-

€ / 100 l

Gas oil

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.27

Mix of advice prices compared with IPE gas oil price

Advice prices

IPE Gas oil price

Advice prices

IPE Gas oil price

Source, CBRB (branch organisation for Rhine and inland navigation in the Netherlands)

Fuel related taxes

The Rhine countries and Belgium do not charge taxes on gas oil used on board of the
vessels on the Rhine, as agreed in the ‘Gas Oil Agreement’ that is part of the Convention
of Mannheim concerning the navigation on the Rhine. This exemption from charges is
not only used on the Rhine, but also on all inland waterways in Belgium, Germany and
The Netherlands. Because inland navigation pays limited fuel taxes, the price of crude oil
is an important part of the gas oil price at the fuel storage stations. Variation in the price
of crude oil thus has a strong direct effect on the final gas oil price (elasticity 0.9-1.0).

As the gas oil is priced in US Dollars, changes in the exchange rate ($ / €) may affect the
outcome for EU transport operators.

Breakdown of transport costs

The costs for an inland vessel consist can be broken down in fixed and variable costs.
Fixed costs (costs that occur irrespective of the vessel operation) comprise the following
components:

•

Labour

•

Insurance

•

Depreciation and interests

•

Maintenance and repair

•

Other operational costs.

Variable cost consists of cost for fuel consumption and cost during operation
(infrastructure cost and lock fees) and port expenses (port dues).

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The cost structure for inland navigation is influenced by various factors, such as the type
and size of the vessel, the type of cargo and the area of operations. It is therefore difficult
to present a general cost structure for inland navigation. Using the typical examples of
costs for dry and liquid cargo vessel transport given in ‘Market observatory for inland
navigation in Europe 2005’ (CCNR and DG TREN), an indication can be given of the
development in the breakdown of transport costs. Table 2.2 gives some examples of the
cost structure are given for small and large vessels for dry and liquid cargo

Table 2.2

Cost structure inland vessels dry and liquid cargo for most important inland waterway areas (Rhine, North-South

corridor, Danube)

2001

Dry cargo

700-1500 ton

Dry cargo

> 2500 ton

Liquid cargo

700 – 1500 ton

Liquid cargo

> 2500 ton

Market share vessels

45%

12%

32%

21%

Av. Value vessel

€ 500.000

€ 2.000.000

€ 700.000

€ 3.000.000

Fixed Cost

74,5%

78,2%

89,7%

88%

Labour

35%

27,5%

57,3%

43%

Insurance

6,5%

7,3%

Depreciation

13,5%

16,5%

10%

12%

Interest

10%

17,5%

7,4%

14,2%

Maintenance & repair

5,5%

4,5%

Remaining cost

6,5%

5,7%

Variable Cost

25,5%

21,8%

10,3%

12%

Fuel

23,6%

18,6%

8,7%

10,3%

Other variable cost

1,9%

3,2%

1,6%

1,7%

Total cost

100%

a) The Market observatory covers the following countries: Belgium, France, Germany, Luxemburg, The

Netherlands, Austria and Switzerland.

Source: Market observatory inland navigation 2005, CCNR en DG TREN

In general the share of labour cost decrease as the vessel dimensions increase. However,
vessels with a volume capacity of more than 1500 tonnage require a minimum of 4 crew
members instead of 2 crew members, meaning that labour costs for 1500 tonnage vessel
can be higher in relative terms than for a >2500 ton vessels. For the vessels with liquid
cargo the requirements for crew are higher (for safety reasons) so the labour costs are
relatively high as well.

The share of cost of depreciation increases as the vessel dimensions increase. This is due
to the age of existing fleet, as smaller vessels are relatively old, and depreciation costs
subsequently relatively low. Furthermore, the fleet of large vessels is being represented
by a considerable number of newly build vessels, which have more depreciation costs.

Based on the NEA survey for the Market Observatory for CCNR en EU

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Also the share of insurance and interest cost increases as the vessel dimensions increase
because of the relative difference in age of the small and large vessels. The share of cost
for maintenance and repair is about 4-5% for both small and old vessels (more often) and
large and new vessels (more expensive). The remaining cost (fixed cost for infrastructure
and ports) are about 7% for all types of vessels.

The share of variable cost consists of fuel cost and vary for the different type of vessels,
because the cost depends of the engine power of the vessel, operating area (Rhine or
small inland waterways) and capacity utilisation of the vessel (load factor). In the above
typical examples fuel costs are about 10-25% of the total annual operating costs of
vessels.

Developments in main components of transport costs

There have been a few developments in the cost structure of inland barges in the period
2001-2005. A main development in the cost structure of inland waterway transport is the
decreasing share of interest costs for all types of vessels. From 2001 onwards the banking
companies lowered the interest rate and so the finance cost for vessel also decreased. The
costs of fuel have been fluctuating in the early years of the period 2001-2005, to rise
steeply in later years. After 2002 fuel costs have almost doubled, because of the strong
rise in the world market price of crude oil. As a result the share of fuel costs for all types
of vessels rose dramatically, to the levels shown above. For many vessels the share of fuel
costs increased to up to 25%.

2.2.5

Rail freight transport

Transport of freight by rail is carried out by trains powered by diesel or electric engines.
In large countries with a high degree of electrified track (France, Germany), electric
motive power is dominant, whereas in smaller countries that have a high degree of cross-
border traffic, the diesel engine is well-represented. This is caused by the differences in
electric systems used in Europe. Rail transport is potentially the least energy intensive
mode of transport in general, but this depends also on the volume transported per train
and the traction used.

There are no pan-European data on the share of diesel in the overall rail freight transport.
A study carried out by AEAT

gives an overall figure of 10 % of all rail transport

(passengers and freight) being fuelled by diesel. However, this figure does not include the
new private rail freight operators, which have a relative ly high share of diesel
locomotives, whereas the majority of the rail transport performance is carried out by
electric passenger trains in large densely populated areas. Correcting for this it can be
roughly estimated that 20 % of all traction in rail freight transport is fuelled by diesel and
80 % by electricity.

The rail freight market in Europe has changed dramatically in the past decade. Rail
freight transport used to be carried out by national railway companies, as part of their
overall rail transport services. In the second half of the 1990s liberalisation started and

AEAT, Rail diesel study (WP 1), 2005

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

new, specialised rail freight transport companies started to operate. Some of these
companies were still closely related to the national railway companies (i.e. Railion in
Germany and the Netherlands, SNCF Fret in France etc.), whereas other entirely new
operators (ERS, Rail4Chem, TX etc.) became (niche) players in this market.

When rail freight was still an integral part of rail transport service (i.e. before
liberalisation), the costs for this mode were only known by approximation, as each
company had its own production models, calculation methods and cross-subsidising
practices. The variety of dedicated rail services for specific clients (a/o chemical industry,
steel industry), often with special transport equipment, adds to the difficulty to provide
insight in the cost structure of rail freight transport. The new commercial rail freight
operators are very reluctant as well with respect to providing insight in their operating
costs.

However, some information on the cost structure of rail transport can be derived from
existing sources, albeit on a more aggregated level. The cost calculation models
developed by NEA and Transcare

can be used to provide insight in the cost structure of

specific rail freight transports. The next table presents an overview of the cost breakdown
for a number of international trips (container and bulk transport, 300 and 800 km trip
length).

Table 2.3

Overview of cost breakdown in rail freight transport using the VKM model calculations

Type

International transport of

containers

International transport of dry bulk

Volume

60 TEU

1.800 Tonne

Category

Diesel

Electricity

Diesel

Electricity

Distance (km)

300

800

300

800

300

800

300

800

Fixed costs per trip (€)

2,197

4,293

1,953

3,642

5,693

8,680

5,495

8,154

Other variable costs / trip (€)

1,326

3,536

1,218

3,248

1,530

4,080

1,455

3,880

Energy costs per trip (€)

1,080

2,880

576

1,536

1,314

3,504

936

2,496

Total costs per trip (€)

4,603 10,709

3,747

8,426

8,537 16,264

7,886 14,530

Percentage Energy/Total

23.5%

26.9%

15.4%

18.2%

15.4%

21.5%

11.9%

17.2%

Energy costs per tonne-km

0.0075 0.0075 0.0040 0.0040 0.0024 0.0024 0.0017 0.0017

Total costs per tonne-km

0.0320 0.0279 0.0260 0.0219 0.0158 0.0113 0.0146 0.0101

Source: NEA, Transcare, “Vergelijkingskader Modaliteiten” (2004) and “Factorkosten van het goederenvervoer”

(Factor costs of freight transport), 2004

These calculations show that the share of energy costs in rail freight transport is between
12 % and 27 % of the total operating costs of a train, depending on the distance and type
of traction. The higher shares are found for diesel traction, while costs of electric traction
are substantially lower.

It should be kept in mind that for individual shipments or operators the figures may be
different, as for instance the fixed costs can vary between the different rail operators (for
instance Railion cannot be compared to a small private operator in a niche market),

Vergelijkingskader Modaliteiten (2004) and Factorkosten van het goederenvervoer (Factor costs of freight transport), 2004

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

whereas the charges for the use of infrastructure will also show a great variation (and are
likely to increase in the near future). The private railway operator ERS has provided some
indications regarding energy costs in the framework of another project. An average
loaded container train uses 5 litres of diesel per kilometre. The total costs for a container
train is around 12.5-15 Euro per kilometre including access charges and profit margin.
Using a diesel price of 0.80 Euro per litre and a profit margin of 6%, the average share of
fuel costs would be around 28-34% of the total cost excluding profit margin, which is in
line with the figures from the VKM model.

Nevertheless, the above figures provide some insight in the share of energy costs, albeit
that the information that is derived from these sources is of a static nature. Due to the
enormous changes in the rail freight market, no reliable information can be found on
long-term cost developments. The transparency of this market is still very low, whereas
the separation of rail and passenger services in the last decade has changed the cost
structure completely. The next table provides some figures for the cost development of
one European operator (NS Cargo) between 1996 and 2002:

Table 2.4

Development of rail cost components NS Cargo 1995-2002 (index, 2002 = 100)

Component

1996

1997

1998

1999

2000

2001

2002

Fixed costs

271.6

296.4

354.5

419.6

189.9

155.1

100

Variable costs

75.8

95.9

100.4

89.5

96.5

121.6

100

Staff costs

85.8

89.0

92.8

93.6

88.3

98.0

100

Specific transport costs

130.9

123.4

121.5

112.6

106.7

111.0

100

Other costs

21.7

30.7

42.6

64.7

54.0

86.3

100

Total costs

132.9

129.3

117.2

109.3

108.3

101.5

100

Source: NEA, Transcare, “Vergelijkingskader Modaliteiten” (2004) and “Factorkosten van het goederenvervoer”

(Factor costs of freight transport), 2004

The table shows that whereas variable costs, staff costs and other costs have increased
since 1996, specific transport costs (traction costs) and fixed costs reduced. Also total
operating costs of the company came down.

2.2.6

Rail passenger transport

By its nature (steel wheels on steel track, causing little resistance), the energy efficiency
of a train is very high. On average, the transport of a passenger by train is 4 times less
energy consuming then the transport by private car, taking into account the actual
occupancy rates.

Passenger rail transport is largely carried out by electric traction in Europe. Statistics
from the UIC (Union International des Chemins de fers) indicate that approximately 90 %
of all rail transport (by the UIC members) is carried out by electric trains.

The price development of electricity has been presented in figure 2.4. This figure shows
that the price of electricity follows the crude oil price only to a small extent. Electricity
prices for large industria l consumers have increased from 2000 tot 2005 with
approximately 15 %, whereas oil prices more than doubled.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The share of energy costs in the total rail transport costs varies because of differences in
the cost structures of the railway companies (they are very hard to determine, see also the
previous paragraph on rail freight transport) and the price that railway companies have
negotiated with the electricity suppliers. An estimation, based on some scarce figures
supplied by Thalys

and the Nederlandse Spoorwegen (NS), indicate that between 4 to

8% of the total operational costs in passenger transport are energy costs. For the Swedish
SJ energy costs had a share of 4-5% in total passenger transport operating costs

, whereas

the Polish case described in the box below shows a figure of app. 6 %.

Example case: passenger (electricity) and freight (diesel) Poland

In Poland rail access charges do not include costs of electric traction. The energy expenses of the operators are

being settled with PKP Energy Ltd. The computed average rail access charge 2003, excl electricity are for

freight 5.8 Euro/trainkm and for passenger 2.21 Euro/trainkm (source: ECMT 2005). In general access charges

are estimated to account for 40% of total cost for rail services (source: DERC, DG TREN). This is applied for

Poland as well, although this is a very rough estimation based on EU25. The total costs for freight are 14.5

Euro/trainkm and for passenger 5.53 Euro/trainkm.

The above information is combined with information on profit and loss accounts from a previous draft business

plan (split into business plans for passenger, freight and infrastructure) for the infrastructure manager in Poland.

It should be noted that ECORYS modified the information, it is unclear whether the draft business plan is indeed

reflecting the present situation. The estimated electricity cost for passengers is 0.5 Euro/trainkm, for freight the

fuel cost amount to 0.8 Euro/trainkm. This represents only 7% of total train service cost for passengers and 6%

for freight.

The impact of an increase of 15 % of the electricity prices will therefore lead to an
increase of the production costs with less then 1 % for both the NS and SJ. The
conclusion that energy costs only have a relative small effect is confirmed by the risk
analysis that SJ has performed (see the next figure).

Note from DGTREN: FJ D (2005)126861

8 Source: Swedish Railroad (SJ) Annual report 2003 and 2004, available at

http://www.sj.se/sj/jsp/polopoly.jsp?d=120&a=8175&l=en#

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.28

Risks pertaining to SJ’s operations in passenger transport

Source: Swedish Railroad (SJ) Annual report 2004, p. 37

It is conclu ded that

the three most important risks for SJ are market factors (purchasing

power, competition with planes and cars), rolling stock risk (the possibility that SJ rolling
stock falls short of passenger expectations or needs) and political risks (deregulation
under conditions that benefit competitors, changes in value-added tax on travel, political
decisions that alter the competitive status of car travel and changes in rail service rights).

A sensitivity analysis, see next figure, depicts the negative effect on SJ's earnings of
different factors. In order to minimize the risk of a heavily negative effect on earnings of
higher electricity prices, SJ utilizes fixed-term electricity contracts of one to three years.
This defers the impact of any price changes.

Figure 2.29

Sensitivity analysis on Swedish Railroad (SJ) earnings from passenger transport

Source: SJ Annual report 2004, p. 38

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2.2.7

Short sea transport

Relation between price of crude oil and marine fuels

The prices of marine fuels (diesel, gasoline and heavy fuel oil) are strongly related to the
price developments of crude oil. From 2001 till now, the bunker prices of diesel and gas
oil (MDO) and heavy fuel oil (HFO) have more than doubled. The price of gas oil has
increased from 205 US dollar per ton to 460 US dollar per ton in the last four years
(2001-2005). Price developments of heavy oil are similar though slightly less dramatic.
Heavy oil has increased from 110 USD per ton to 235 USD per ton in 2005. In the case of
short sea transport the elasticity of fuel costs to crude oil prices is therefore around 1.

Taxation

Since marine fuels are not taxed by the national governments, price raises of crude oil
will have immediately effect on the level of marine bunker prices. There is no factor (i.e.
high taxes) which levels off the effects of crude oil price increases on fuel prices, like is
the case for road fuels.

The next figure presents the development of crude oil and marine oils between 1995 and
2005, clearly showing the dramatic increase of the price of gas oil in the last hike period
(2004/2005).

Figure 2.30

Price development crude oil and marine fuels (1995-2005), international data from Platts

Price development crude oil and marine fuels

(USD per ton)

100

150

200

250

300

350

400

450

500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Heavy oil

Gasoil

Crude oil

Source: Platts

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Share of fuel costs in total transport costs

The share of bunker costs in the daily running costs of a ship is substantial. Calculations
carried out in the REALISE project in 2002 indicate that for a representative corridor the
share of fuel costs is between 15 and 20 % of total transport costs. In another study

the

share of energy costs in the total transport costs of short sea movements have been
estimated around 30%. Investment and insurance costs represent 27% of total transport
costs. The share of labour costs is relatively small representing around 15% of total
transport costs. This is presented in the next figure. The data are considered as
representative for short sea shipping in Europe.

Figure 2.31

Breakdown of total transport costs of short sea (2002, based on data of a selection of West-European countries)

30%

29%

11%

27%

15%

16%

13%

12%

container/bulk

tanker traffic

- overhead & other costs

- port costs

- labour costs

- investments & insurance

- materials & repair

- energy

Source: NEA , Factorkosten van het goederenvervoer (2004) / Drewry Shipping Consultant (modified by

ECORYS)

The recent hike in crude oil prices will have pushed up the share of fuel costs to higher
levels. Since most of the time ships that are involved in short sea shipping are operating
in time charter, price raises of bunker costs will affect the revenues of the operator
immediately. Time charter contracts cannot be changed for adjustment of higher fuel
costs, so the operator can’t pass on the higher bunker prices to the transport company.

For small ships, for instance less than 3,000 deadweight (DWT) above-mentioned effects
could be more disastrous than for bigger ships, because of the higher share of the bunker
costs: for some vessels the bunker costs will be half of the net profit. When marine fuel
prices double, the total net profit can shrink.

Development in main cost components of transport costs

Compared to the cost level of 1996 most cost components in short sea shipping have
declined until 2000. From 2000 onwards the different cost components are developing
towards the 1996 level again. Overhead and other costs however have risen since 1996 in

Factorkosten van het goederenvervoer: een analyse van de ontwikkeling in de tijd, NEA, April 2004.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

both container and non-container transport by short sea. Labour costs in non-container
transport have shown an increase as well.

Figure 2.32

Development in main transport cost components of short sea shipping (1996-2002)

Container shipping

100

105

110

variable costs

investments &

insurance

labour costs

port costs

overhead & other

costs

total costs

index 1996=100

1997

1998

1999

2000

2001

2002

Non-container shipping

100

105

110

variable costs

investments &

insurance

labour costs

port costs

overhead & other

costs

total costs

index 1996=100

1997

1998

1999

2000

2001

2002

Source: NEA, Factorkosten van het goederenvervoer (2004)

Variable costs, of which 75% are energy costs, have also declined in between 1996 and
2000. Costs for materials and repair, which represents the other 25% of the variable costs
are declining due to a shift of maintenance services towards Eastern Europe and Asia.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The overall decline of variable costs however is slowing down due to higher fuel prices

Although not presented here, the various cost categories have risen again after 2002.

2.2.8

Aviation

Relation between price of crude oil and kerosene

Over the years the development in the price of jet fuel has shown a similar trend as the
crude oil price. In times of high oil prices jet fuel prices also rise and sometimes even
faster than the price of crude oil. This relation is shown in the next figure.

Figure 2.33

Developments in jet fuel prices and crude oil prices, 1975-2005

Jet kerosine and crude oil prices at the world market 1975-2005

100

120

140

160

180

200

220

jul-75 jul-76 jul-77 jul-78 jul-79 jul-80 jul-81 jul-82 jul-83 jul-84 jul-85 jul-86 jul-87 jul-88 jul-89 jul-90 jul-91 jul-92 jul-93 jul-94 jul-95 jul-96 jul-97 jul-98 jul-99 jul-00 jul-01 jul-02 jul-03 jul-04 jul-05

US$ ct per gallon

Jet kerosine

crude oil

Source: U.S. Energy Information Administration

As a result, the share of fuel costs, which represents a main component of the total airline
expenses, fluctuates significantly. This is presented in the next figure. During the first and
second oil crises the fuel costs amounted to 20% or 30% of total airline expenses. After
the decrease in oil prices the share of fuel costs in total costs decreased to 10-15%. Fuel
costs represented 14% of total airline expenses in 2003 for worldwide airlines and
reached 18% of total expenses in 2004. For a fleet with a large new-generation fuel
efficient aircraft type, fuel costs can represent as little as 10% of their total operation cost,
compared with as much as 30% for the least efficient fleet (with old-generation fuel
inefficient aircraft types).

Source: Factorkosten van het goederenvervoer: een analyse van de ontwikkeling in de tijd, NEA. April 2004.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.34

Fuel costs as a percentage of total airline expenses

Source: Airbus: „Global Market Forecast 2004-2023“, Airbus S.A.S, December 2004

The share of fuel costs in total costs also differs between large ‘traditional’ airliners and a
low costs carrier (LCC). Below a comparison of cost structures is given for Iberia (large
traditional company), Spanair (tourist airline, affiliated to SAS which has been increasing
its offer to non-tourist destinations) and Ryanair (one of the principal LCCs):

Figure 2.35

Cost structure of Iberia, Spanair and Ryanair, 2003 and 2004

IBERIA

SPANAIR

RYANAIR

COSTS

2003

2004

2003

2004

2003

2004

fuel (*)

13,50%

16,83%

12,77%

15,95%

21,69%

26,42%

Cabin crew

8,69%

8,35%

9,27%

8,93%

8,32%

7,82%

General and administration

22,74%

21,86%

6,03%

5,81%

14,73%

13,84%

Hanger rentals

9,28%

8,93%

20,96%

20,19%

0,00%

Maintenance

6,30%

6,06%

6,13%

5,91%

5,05%

4,74%

Amortisation

4,18%

4,02%

3,94%

3,80%

12,55%

11,79%

Airport taxes

3,23%

3,10%

9,97%

9,61%

18,55%

17,43%

Flight taxes

3,01%

2,89%

5,44%

5,24%

13,51%

12,69%

Parking costs

8,25%

7,94%

0,00%

Passenger services

9,37%

9,01%

6,97%

6,71%

2,73%

2,56%

Promotion and sales

10,69%

10,28%

6,29%

6,06%

2,05%

1,92%

others

0,77%

0,74%

12,24%

11,80%

0,82%

0,77%

Operational results / income

-9%

30%

(*) For year 2004 figures estimated under two conditions: increase of 32,7% in Brent oil price and no changes in

other costs structure.

Source: ICAO Data Website for year 2003.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The above figures show that an increase in fuel costs has bigger impacts on the total costs
for Low Cost Carriers compared to the traditional companies. Thus Low Cost Carriers are
more vulnerable in times of great fuel price increases compared to traditional companies.

Kerosene taxation

There is no taxation on kerosene. Therefore, fluctuations in the price of crude oil are not
being levelled off by taxes. The general progression in introducing a kerosene tax for
aviation is slow (see box below). According to Directive 2003/96/EC, the Council, in
principle, allows kerosene taxation on national and intra-Community flights. But this has
to be agreed on through bilateral Air Service Agreements between member states or
through a unanimous decision by the Economic and Financial Affairs (ECOFIN) Council.
Both processes are cumbersome, as are the attempts to allow kerosene taxation on flights
between EU and non-EU countries.

Kerosene taxation on flights between member states and third countries is also generally
prohibited by Air Service Agreements between member states and third countries. It is
important in this respect to note that in 2002 the European Court ruled that “the
Community acquires an external competence by reason of the exercise of its internal
competence” (CEC, 2002). As a result, Member States are no longer allowed to make
new or maintain existing bilateral open skies agreements. The Council has given the
Commission the mandate for negotiating new agreements, a process that is currently
ongoing. In principle, this re-negotiation process opens a window of opportunity to
ensure that the clauses prohibiting kerosene taxation are removed from the Air Service
Agreements.

Background to the excise duty on kerosene (kerosene tax)

In 1992, the Council adopted a directive for the harmonisation of the excise duty on energy (92/81/EEC).

Article 8 1(b) of this directive provides a compulsory exemption from this minimum excise tax for aviation. The

directive also requires a review of this mandatory exemption, which the Commission carried out in 1996 (CEC,

1996). The Commission concluded that the exemption should be lifted as soon as it became possible to levy

such a tax on all carriers, including non-EU carriers. The Commission’s proposal for the replacement of

Directive 92/81/EEC reflected that opinion. There was, however, much discussion in various Council working

groups about this proposal, resulting in yet another request by the Council to the Commission to provide

further information. This resulted in a recommendation to the Council to adopt a proposal permitting member

states to levy tax on aviation fuels used on national flights, or by bilateral agreement, intra-Community

movements (CEC, 2000). It also recommended intensified work with the ICAO on the subject of kerosene

taxation. Through Directive 2003/96/EC, the Council finally allowed kerosene taxation on national and intra-

Community flights.

Source: Aviation in the EU Emissions Trading Scheme - A first step towards reducing the impact of aviation on

climate change; W Tuinstra, W de Ridder, LG Wesselink, A Hoen, JC Bollen, JAM Borsboom; Netherlands

Environmental Assessment Agency, 2005.

There exists fierce opposition toward kerosene taxation within the aviation sector. The
concept of emission trading is also envisaged as an instrument for the reduction of energy
consumption and emission of greenhouse gasses. The latest developments in this field are
presented in the next text box.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Emission trading in the aviation sector

A key element of EU policy in promoting the stabilisation of GreenHouse Gas emissions is the EU
Emissions Trading Scheme (EU ETS), which was established by EU Directive (2003/87/EC). The EU-
ETS currently applies only to energy -intensive industries (cement, iron & steel, electricity generation,
etc.). National governments set a cap on CO2 emissions for each individual plant. The plants are then
allowed to trade their surplus allowances on a special EU-wide 'carbon market' (one allowance = 1
tonne of CO

). Companies exceeding their limit can buy pollution credits from those that have curbed

their emissions below their cap. Companies that exceed their quota would be fined for every tonne of
carbon emitted above their quota. On 27 September 2005, the European Commission proposed
including aviation in the EU-ETS. Under the proposal, a cap on CO

would be set for all flights

departing from the EU, including international flights, so that European airlines are not put at a
disadvantage as against foreign competitors

The inclusion of aviation in the ETS is welcomed by the aviation industry as an alternative for fuel
taxation or emission charges. However, the Commission's plan to bring air transport into the ETS has
met considerable criticism as well. Both IATA and ICAO have stated that to establish an effective and
equitable emission trading system many barriers must be overcome including the uncertain cost
implications, impacts on relative economic competitiveness, wealth transfers and the lack of a level
playing field. This position was shared by US Federal Aviation Administration (FAA). The International
Air Carrier Association (IACA) has warned the Commission for the financial impact of including aviation
in the EU- ETS

. Finally, Energy Intensive Industries have stated their concerns about the possible

consequences of the inclusion of aviation in the ETS. They fear this would impair their competitiveness
as the aviation sector would be a net purchaser of allowances (no reduction possibilities) with high
abatement costs and a full capability to pass on costs to customers.

A decision is still to be made on the actual cap on emissions and a formal legislative proposal is tabled
in mid-2006. Amongst others it has to be decided how to impose a cap on those foreign carriers,
integrate international transatlantic flights in the EU scheme. So far, the US and other foreign carriers
are not subject to emissions reductions because their countries have not signed the Kyoto Protocol.

Latest & next steps

•

First half 2006: expert group to submit report on technical aspects of integrating aviation in
EU-ETS

•

Mid-2006: review of EU- ETS kicks off. Member states send their proposed NAPs for second
phase (2008-2012)

•

End 2006: Commission to table a formal legislative proposal to integrate aviation in EU-ETS.
It would have to be adopted by the European Parliament and member states at the EU
Council of Ministers, a process which usually takes two to three years.

•

2008: second phase of EU-ETS starts. If adopted in time, the proposal to include aviation in
EU-ETS could take effect then. If not, the Commission says it could still bring it in at a later
stage, maybe as early as 2009-2010.

•

2012: second phase of EU-ETS ends.

A study by CE Delft estimates that the entering into the ETS should not add more than € 9 to the price of a return ticket.

Source: CE Delft, ‘Final report – Inclusion of aviation under the European Emission Trading System (ETS): design and

impacts, 29 July 2005.

International Air Carrier Association (IACA), public statement, 1 December 2005.

Alliance of Energy -intensive Industries, The Impact of EU Emission Trading Scheme (ETS) on Power Prices, November

2005.

EurActiv, Climate change and Aviation, 22 May 2005, Updated 22 March 2006.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2.3 The relation between transport costs and transport prices

2.3.1

Introduction

Having described the relation between the price of crude oil and transport costs for each
mode of transport, the present section will review how the increased transport operating
costs are being translated in transport prices. This mechanism may be influenced by the
competitiveness of the market, by market conditions, by government regulation and by
market power of the specific operator vis-à-vis his client. For instance, strong competition
in a market may prevent transport operators to fully charge the increased costs to the
customer immediately. Or, in periods of oversupply of transport capacity, it will be more
difficult to increase prices in response to higher transport costs, while in periods of
excessive demand this may be relatively easy.

2.3.2

Road freight transport

This section goes into the relation between the transport costs borne by the commercial
road haulier and the prices paid by the client for the services provided by the haulier.
Crucial here is to what extent commercial hauliers are able to pass on increases in
transport costs to their clients (shippers). Road transport on own account is not included,
because in own account transport the (transport) companies are able to pass on any
increase in transport costs in the price of the transport and/or the price of the goods. The
share of own account transport in total international transport (in ton-kilometres) is some
7.8% (source: Eurostat, New Cronos database).

Development of transport costs and transport prices

Transport costs have risen substantially in the past 10-15 years. Main elements in this
have been the steady increases in fuel prices and labour costs, but also other costs
elements (road tolls etc.) have increased. The figure below shows that the recent increase
in costs has not been fully reflected in the freight rates of Dutch road haulage companies.
In domestic transport the increase in transport costs in the period 1990-2004 is just below
50%, whereas prices have increased by around 25% in the same period.

In international transport the developments of transport costs and prices diverge even
more. As Dutch transporters are operating internationally, it is to be expected that
operators from other countries operating in the international market have experienced a
similar erosion of their margins.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.36

Development of costs and prices in road freight transport by Dutch hauliers

Domestic transport

International transport

Transport costs (nominal)

Transport prices (nominal)

Transport costs (real)

Transport prices (real)

Domestic transport

International transport

Transport costs (nominal)

Transport prices (nominal)

Transport costs (real)

Transport prices (real)

Source: Transport in Cijfers, TLN

The same holds for French road hauliers who have faced an increase of transport costs of
17% in the period 2000-2005, and an increase of only 5% in their transport price over the
same period (see next figure).

Figure 2.37

Development of costs and prices in road freight transport by French hauliers (July 2001 = 100)

Costs and Prices in France

117

105 est.

100

105

110

115

120

janv-00

janv-01

janv-02

janv-03

janv-04

janv-05

janv-06

Costs

Prices

SES/CNR

Source: French national Road Comity (CNR)

There might be a relation of course between the increase of fuel costs and the divergence
between transport costs and prices. In the period 1999-2000, during which fuel costs have
risen enormously

, the level of transport costs and prices has risen as well, although the

increase in transport costs is more steeply than in prices. It appears that transport
companies are not able to pass on the total increase in fuel costs (and the increase in other

15 Between 1-1 -1999 and 1- 1-2000 the price of a litre of diesel rose with around 10%.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

cost components). Some proof for this is given in the Freight taxes inquiry by Burns

where respondents to the inquiry state that the costs of fuel have not been fully recovered
by rate reviews or fuel cost recovery mechanisms with customers.

This subject has also been touched upon recently in another study carried out by
ECORYS, on minimum road clauses

. These so-called revision clauses relate to sudden

and large cost increases. In practice this only holds for increases in fuel prices, as the
development of other cost items is generally more levelled. The majority of contracts
between road transport companies and their clients have a fixed character and are the
result of a tender procedure. In approximately 20 % of the contracts there are provisions
included to deal with strong increases in the costs of transport during the contract period.
The majority of road freight contracts, therefore, do not contain such a price revision
clause. Road transport organisations (a/o in The Netherlands) and governments (Denmark
and France) provide the advice to hauliers to include a minimum clause, but on a
voluntary basis.

The duration of most contracts (around 80 %) is 1 year or less (including single contracts,
for one trip), hardly any contracts cover a time span longer then 2 years. Besides single
contracts, the one year-contract is the most common. It further appears that a large
amount of transport is carried out without any written contract. Information from the
Netherlands hauliers organisation TLN indicates that this realties to up to 40 % of all
transport. These ‘oral contracts’ mostly refer to single trips.

Development of profitability

Obviously these diverging trends between transport costs and prices must have had an
impact on the profitability of the sector. Unfortunately on this point limited information is
available in international terms, but low profitability is recognised in the sector as a
widespread problem

For the Dutch and French transport sector some information on profitability is available.
Profitability here is defined as the net-surplus as a percentage of the companies’ revenues.
The next figure shows that, after having reached very high levels in 1986, the profitability
of both domestic and international road freight transport has decreased continuously, to
below zero for Dutch hauliers. In international transport profitability was already negative
from 1999 onwards, in domestic transport from 2003 onwards. Again, as international
transport is a competitive market, the trend may be similar for international operators
from other countries.

16 The Burns Report – Freight taxes, November 2005.

17 Impact Assessment of the Modification of Council Regulation No 4058/89 - Assessment of the regulation on the fixing of

rates for road transport between Member States , ECORYS/Trademco, August 2005.

The IRU sees the low financial performance of the international road freight sector as the most important problem of the

sector.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.38

Profitability in domestic and international road transport in the Netherlands

-3

-2

-1

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

percentage (%)

domestic

international

Source: Transport in Cijfers, TLN (Modified by ECORYS)

A French report from 2005

concludes that profitability levels in road freight transport in

France will be no higher than 1-2% and that as soon as additional increases in fuel prices
arise, losses will occur. The next figure presents the development of the profitability rate
in the period 1986-2004 for French road haulage companies. The period 1986-1988 has
been very successful with profit margins of 2.9%, with a sharp decline since. In 2001
margins arrived again above 2%, but are expected to arrive at around 1% in this year.

Figure 2.39

Profitability in the French road transport sector

Profitability rates

1,7%

2,9%

2,5%

2,0%

1,1%

1,0%

1986

1996

2004 (e)

SES-EAE

Source: French national Road Comity (CNR)

This trend is confirmed in a report by the Spanish Ministry of Public Works

: it is stated

that in 2005 the profitability in truck fleet exploitation has worsened, especially with the

Trimestral report from CNR (Comité National Routier), France, 2005

"Spanish Ministry of Public Works Press Release, Spain, January 2005"

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

increase in the fuel prices, while freight prices have remained stable since 2000 or even
dropped in many traffic relations.

The next graph also clearly shows how margins for UK hauliers have been reducing in
the last 5 years. Another study

reports that 19% of haulage companies in the UK are in

loss, with 10% in loss for a second year.

Figure 2.40

Change in net margins of UK hauliers

Source: Freight Taxes , The Burns report (November 2005)

Apart from the increase in costs, other factors can have an influence on low profitability,
for instance lagging demand from customers due to low (and negative) economic growth,
and an increased competition which has become a major factor recently since transport
companies from the new Member States have access to intra-Community transport as
well. With lower wages than in the old Member States, there is a downturn pressure on
transport prices. Also the high number of own-drivers who work for freight rates that are
very close to the cost price, has a negative impact on the profitability of the transport
sector. These same conclusions are drawn in France and Spain in order to explain the low
profitability in road freight transport.

2.3.3

Inland waterways

Development of transport costs and transport prices

The inland waterway transport sector operates in a highly competitive market, with some
overcapacity in market segments. This puts downward pressure on the transport prices,
even in periods of rising transport costs. The transport cost of the ship owners and the
freight tariffs they are charging to the users of their services differ by market sector (i.e.
transport of container, liquid bulk, dry bulk) and geographical area (i.e. Rhine, Danube,
French Canals) and also depend on the available water depth.

The Market observatory inland navigation 2005 shows some developments in costs and
tariffs for the dry cargo market and liquid cargo market on the waterway Rhine. Whereas
transport operating costs (blue line in the figure) have risen steadily since 1998, freight
tariffs (the red line) have fluctuated strongly , as it is without any relation to developments

Plimsoll Portfolio Analysis: Road Haulage.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

in costs. The figure shows some short periods with exceptionally high freight tariffs, but
these periods are typically followed by a period of stabilisation or low freight tariffs.

Figure 2.41

Development of costs and prices in the inland shipping market for dry cargo and liquid cargo

Source: Market observatory inland navigation 2005 CCNR and DG TREN

The Market observatory covers the following countries: Belgium, France, Germany, Luxemburg, The

Netherlands, Austria, Switzerland.

2.3.4

Rail freight transport

The lack of transparency of rail freight costs is also reflected in the information on rail
freight tariffs. Prices for rail services are often negotiated on a business-to-business basis
and tariffs depend to a large extent on the cost model applied and the market policy of the
operator. In many cases, the price strategy is based on the development of the prices in
the competing modes, inland shipping and road transport, and thus not or to a low extent
on rail freight transport costs.

Development of costs
Development of volume

Dry cargo market

Liquid cargo market

Development of costs

Development of tariffs

Development of costs

Development of tariffs

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

This is illustrated by the next figure, which presents the cost development for
international rail transport compared to road and inland shipping for the period 1980 to
2000 (for Dutch companies), which includes the oil price hike of 1990.

Figure 2.42

Real price indices of international freight transport per tonne-kilometre of Dutch companies carrying out

international transport (1980–2000)

Sources: NS, 2001; CBS; NEA, 2004.

The emergence of low-cost road transport operators and drivers from the new Member
States in the period 2004-2005 has further decreased the competitive position of rail
freight transport, which contributes to the low (and in some cases negative) profitability
of large rail freight operators like Railion and SNCF Fret.

McKinsey has calculated recently that the rail freight operators would have to decrease
their prices with at least 50 % in order to become competitive with road transport. This
poses a great threat to passing on the costs of oil price increase (see also section 3.1.3),
even though, as shown above, the impact in rail freight transport is substantially lower
than for road and inland waterway transport. In this respect the rail freight transport sector
might be more affected by the prices introduced for the use of the rail infrastructure.

2.3.5

Rail passenger transport

Prices of rail tickets are usually determined not so much by transport operators costs, but
rather by policy makers and politicians. Only in recent years rail companies have been
made more independent (state) companies which can negotiate passenger tariff changes
with the government on the basis of business observations. Still, however, rail passenger
services are in many cases (partly) subsidised, as it is considered as a public service.
Increases of the fares usually follow inflation patterns.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The next figure describes the development of the rail and bus / tram price indices for the
period 1980-2000 in the Netherlands.

Figure 2.43

Development of rates in rail and bus/tram transport in the Netherlands

Source: Centraal Planbureau 2001

It can clearly be seen that the increases are rather steady and there appears no relation to
the high fluctuations in the oil price. The same conclusions can be drawn for the
development of rates in rail and bus transport in France and Belgium (see next figures).
For bus transport companies, this has become a problem in the last price hike as they
cannot increase their tariffs. For rail transport operators the consequences of energy cost
increases are marginal, as has been shown in the previous paragraph.

Figure 2.44

Price development in passenger transport by rail and bus in France and Belgium (1998=100)

Price development in passenger transport by rail

20,0

40,0

60,0

80,0

100,0

120,0

140,0

2006-02

2005-02

2004-02

2003-02

2002-02

2001-02

2000-02

1999-02

1998-02

1997-2

1996-02

1995-02

1994-02

1993-02

1992-02

1991-02

1990-02

Index (1998=100)

Belgium

France

Price index railways

Price index tram/bus

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Price development in passenger transport by bus

20,0

40,0

60,0

80,0

100,0

120,0

140,0

2006-02

2005-02

2004-02

2003-02

2002-02

2001-02

2000-02

1999-02

1998-02

1997-2

1996-02

1995-02

1994-02

1993-02

1992-02

1991-02

1990-02

Index (1998=100)

Belgium

France

Source: Statistical bureau of France, available at:

http://www.indices.insee.fr/bsweb/servlet/bsweb?action=BS_RECHGUIDEE

and Statistical bureau of Belgium,

available at:

http://www.belgostat.be/belgostat/GlobalDispatcher?TARGET=/TreeviewLinker&rowID=1677&prop=treeview&a

ction=open&Lang=N

The price development in rail transport differs per country, as do political decisions on
subsidising and cost structures of operators. The figure below presents a long-term
comparison of costs for passengers in the UK travelling by rail, bus or own car, as well as
their disposable incomes over a longer period. It shows that rail (and bus) fares have more
or less followed disposable income. It also shows that the increase in fares has been
steady, with some decreases in periods just after oil price hikes (1975, 1984). The decline
in oil prices since 1985, however, does not reflect in lower rail fares (or bus fares). Given
the low exposure of rail costs to oil prices, this was also not to be expected though.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.45

Development of rates in rail and bus/tram transport in the United Kingdom

Source: GIVENTIS, 2001

Finally it should be noted that pricing policy for passenger rail travel in France is
beginning to be influenced by factors other than those directly related to cost structures
and to variations in energy prices. Specifically, the French national railway company
SNCF has introduced a policy of price variation according to demand, in order to make
each ticket sold more profitable. This means that prices per km rise in function of
demand, using promotions according to the date the ticket is purchased and increasing
internet sales, following the trend set by low cost airline companies, their competitors in
long distance travel.

2.3.6

Short sea transport

The short sea transport sector consists of a number of very different types of transport,
commodities and vessels: roll-on-roll-off and ferry transport, dry and liquid bulk and
container transport. The type of operators varies substantially as well: from small
companies (comparable to inland shipping enterprises) to very large, global players (a/o
in the container transport market). It is thus a very diverse market, for which no integral
freight rate data are available. However, the short sea market structure is not much
different from the deep sea market, although ship sizes are of course sometimes smaller.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.46

Development of freight rates in deep sea transport (index Jan. 1998 = 1000)

Source: Platts

It shows that freight rates develop differently for different market segments. In container
traffic rates fluctuate, but in a much less volatile manner than rates in the dry bulk and
liquid bulk sectors. It shows the impact of market conditions, which makes that in periods
of scarcity in capacity freight rates can shoot up sharply, only to fall again in the next
months. The figure also shows that the oil price shocks in 2000 and 2004/2005 may have
contributed to the higher freight rates. At the other hand, market conditions like excessive
or depressed demand are also known to influence freight rates, which may explain the
rather different patterns of freight rate developments between the three sectors.

The next figure zooms in on the freight rate development in the container transport
market (between 1998 and 2005) , whereas the bottom line represents the 1000 TEU ship
size, which is often used for short sea.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 2.47

Development of freight rates in see container transport (in US$ per day)

Source: Clarkson Container Market Report, Issue 106

This figure shows a sharp increase of prices in 2005, where it can be assumed that the
increase of oil prices is one of the causes, besides an increased demand for transport. The
smaller ship sizes appear to react less volatile then the larger ones, but the general pattern
is similar.

2.3.7

Aviation

In the case of aviation, as with other modes of transport, the relationship between
transport costs and the prices applied can be described in the following terms:

•

For the services that operate according to the market, prices reflect costs, but these
absorb the short- and medium-term effects related to price elasticity of demand.

•

For the services offered as “public service”, the transfer of costs to prices is done
following political-administrative criteria, price elasticities of the respective demands
may come into the application of this, although it retains a strong component of
subsidisatio n.

In these terms, it can be said that there are three large market segments:

•

The segment that is characterised by low elasticity demand in which users that travel
for business or work reasons predominate.

•

The segment that is characterised by demand of high elasticity, mainly consisting of
tourists. In this segment it can also be stated that price elasticity increases as the low
cost supply grows, starting with those of the Low Cost Carriers.

•

The segment which falls outside the realm of market competition, whether because of
economic objectives or geopolitical decisions, is mainly made up of users in

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

disadvantaged regions and/or lacking terrestrial transport alternatives (island and
overseas territories).

In the first segment, a direct transfer of costs to prices is produced, for example through
overpricing, clearly justified by the increases in energy prices and printed as such on the
tickets themselves.

In the second segment, a re-organisation of supply is produced, oriented towards avoiding
the repercussions of greater costs for prices, to the point that supply achieves a decreasing
price curve, independent of cost increases resulting from increases in energy prices.

This is illustrated in the chart below. It shows how European network majors have
managed to cut the unit cost of flight operations by 9% in the past 3 years, despite the
63% rise in the pric e of fuel of that period. Distribution and back office unit costs have
been slashed by a quarter, due to technologies such as e-ticketing and on-line booking.
The one major area where costs are not falling is the cost of using airports and other
infrastructure. In the absence of effective economic regulation, the lack of competition in
these sheltered supplier markets means there is still insufficient pressure for efficiency
improvements.

Figure 2.48

Unit cost performance for European network majors, short-haul

Source: “New Financial Forecast”, IATA, March 2006

In the third segment, public funding is maintained, with some minor differences in the
distribution of prices: the retention of cost proportions covered by ticket prices or a
review of this policy to avoid serious subsidy increases.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

2.4 Conclusions on the relation between oil and transport prices

This chapter has analysed the composition of the total transport costs in different
transport modes for the Member States and the relation between oil prices and transport
costs. The first step taken in this analysis was to establish the relation between crude oil
prices and energy costs. It can be concluded that:

•

Due to the absence of taxation and low processing and distribution costs, the variation
in the price of crude oil directly affects the fuel prices for inland waterway transport,
short sea shipping and aviation.

•

In other cases, the relation is weaker, due to processing and distribution costs and
taxes and duties. The relation between the price of diesel and petrol to the price of
crude oil is around 0.4.

•

The relation between the price of crude oil and costs of electricity is very weak.
Electricity prices tend to be almost insensitive to the price of crude oil, giving an
elasticity of 0.15 at the maximum.

•

The role of fuel costs in total transport costs varies per type of shipment, distance,
occupancy rates, etc. In general for road freight movements fuel costs are 20-30% of
total transport costs, in inla nd waterways 10-25%, in rail freight operations 15-25% in
case of diesel and 15% in case of electric traction, in short sea shipping and aviation
15-30%.

•

Combining these data, a doubling of the price of crude oil may affect road freight
transport costs by approximately 10%

, inland waterway transport by 10-25% and

short sea shipping by 15-30%. In rail freight operation only diesel operations are
effected, at around 10%, but transport costs of electric traction may increase only a
few percent. Short sea shipping and inland waterway transport are thus most affected
by variations in the price of crude oil, followed by road freight transport and rail
freight transport.

•

The costs of energy are around 25% of total costs for car users (80% of variable
costs), around 5% for bus companies, 5-10% for rail passenger transport (electric)
and 15-30% in aviation.

•

In passenger transport, the costs of aviation are the most sensitive to variations in oil
prices. A doubling of the price of crude oil is likely to increase avia tion costs with 15-
20%. This would affect total passenger car costs with 10% (but may increase variable
costs with 30%), while rail transport operations would become only slightly more
expensive. The costs for rail passenger transport (electric) are the le ast sensitive to
variations in oil prices. Due to the weak relation between electricity prices and the
price of crude oil and the low share of electricity costs in total rail transport costs, the
impact of an increase in crude oil prices in rail passenger transport is marginal (i.e.
the impact of an increase of 15% in electricity prices will lead to an increase of
production costs with less than 1%).

Taking the average share of fuel costs in road freight transport costs (20-30%, see section under heading Share of fuel costs

in total transport costs ) and the share of production costs (i.e. all costs without taxes) in total diesel costs (45-70%, see

section under heading Fuel related tax: excise duties ), the production costs (crude oil, refining, distribution) of diesel can be

estimated to be around 9-21% of transport costs. As only a part of the production costs consists of crude oil (assumption is

65% on average), a 100% increase in the price of crude oil may affect road freight transport costs by on average 10%.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The conclusion that the share of crude oil prices in the final transport costs varies per
mode and transport segment as well, resulting in different reactions of the different
transport modes on crude oil price hikes is illustrated in the next figure.

Figure 2.49

Overview of transport modes and their reaction on crude oil price hikes

On the X-axis the share of crude oil in the transport costs is presented, the Y-axis
describes the reaction of fuel (and electricity) prices on hikes in crude oil prices. The
figure shows that rail transport is relatively the least effected by price shocks, whereas air,
short sea and inland shipping will be most affected by price shocks. The main reason for
this being the fact that the taxation for road transport fuels is the highest, which leads to a
substantial ‘cushioning’ effect.

In a next step it was analysed to what extent the energy costs influence the transport
prices or tariffs . It appears that in many cases the relation between costs and prices is not
as straightforward as one might expect. Freight rates tend to follow a different pattern,
mainly as a result of market conditions , sometimes not allowing transport operators to
fully charge cost increases to customers. This may in some sectors (e.g. road freight
sector) result in reduced or even negative profit margins for the operators. Other sectors
are better capable of passing-on the costs of increased fuel prices to their customers,
which is further elaborated in the next chapter, where the reactions of transport operators
are described.

In the case of passenger transport, car users get the ‘full blast’ of fuel cost increases,
which might affect their short term behaviour (car use) or longer term behaviour
(purchase of car). Rail (and public transport) passenger are generally not affected by
increases in the costs of operators in the short run. In the longer run, tariffs tend to

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

increase in line with inflation and household income. Aviation is quite a different sector
in this respect, as it is mostly outside the domain of public obligations and is at the same
time quite sensitive to oil price increases.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

3 Impacts and reactions in freight transport

This chapter focuses on the reactions by providers of freight transport services and users
of freight transport services to oil price increases. Such reactions depend, of course, on
the magnitude of the increase in transport costs or prices, as analysed in chapter 2. But
such reactions are not only governed by (sudden) costs increases or tariff changes. Also
the increased uncertainty or unpredictability of prices may have an effect on suppliers and
users. Also the reaction may be quite different in the short run as opposed to the longer
run.

3.1 Reactions by providers of freight transport services

3.1.1

Road hauliers

Because taxation on diesel is relatively high in most EU-countries, increases in the price
of crude oil and in the flat diesel price are levelled off (see also section 2.2.2).This is
particularly true if road haulage companies are being compensated by governments
through lower taxes in times of oil price hikes. This however has not been the case during
recent periods of oil price hikes. This means that road haulage operators have to pass on
oil cost increases to their clients in order to protect themselves from the negative impacts
of higher oil prices.

A recent study in the UK

touches upon this subject by asking road haulage companies if

they are able to recover fuel cost increases. The UK is amongst the countries with the
highest fuel prices for commercial vehicles. The proportion of hire and reward operators
in the UK consistently recovering a substantial proportion of higher fuels costs between
2000 and 2005 was 20 % for English operators and 18% for Scottish operators. Another
study on minimum road clauses

, which has been recently carried out, reports that about

20% of the contracts between road transport companies and their clients include
provisions to deal with price hikes, including oil price hikes.

Where hauliers are operating in (highly) competitive markets and where their economies
are particularly exposed, the negative effects can be sizeable. This holds especially for
own-drivers who work for freight rates that are very close to the cost price. Container
transport by road is also known as a small profit margin market. Compared with other
specific market segments, profitability in container transport by road in the Netherlands
was negative in the period 1998-2002 (see next figure).

23 The Burns Report – Freight taxes inquiry , November 2005.

24 Impact Assessment of the Modification of Council Regulation No 4058/89 - Assessment of the regulation on the fixing of

rates for road transport between Member States, ECORYS/Trademco, August 2005.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 3.1 Profitability of Dutch road hauliers in international transport by market segment (1993-2003)

Conditioned/frozen food

Liquid bulk

Trucking/container

Percentage

Conditioned/frozen food

Liquid bulk

Trucking/container

Percentage

Source: Transport in Cijfers 2004, TLN (Modified by ECORYS)

This development of negative profits for road transport companies is similar in other
West-European countries (see paragraph on development of profitability in section 2.3.2).
In case road haulage companies are not able to pass on higher transport costs completely,
negative impacts of these higher transport costs could be levelled off by improving the
efficiency of the transport operations. There are several ways to improve transport
efficiency.

Improve vehicle load factor

A transport operator can save costs by improving the load factor of the trucks. In general
the occupancy rate of road transport is rather low, due to inefficiencies in time and
space

. This is more prominent in national transport than in international transport. In

terms of journeys the percentage of empty running is some 40% in national transport and
28% in international transport. In terms of vehicle kilometres these numbers were
respectively 25% and 12%

. However the numbers vary over the Member States, with

relatively high empty running in Cyprus and relatively low empty running in Denmark
(see next figure).

25 The low occupancy rates are not always to be avoided and do not necessarily signify that there is overcapacity in the

market. Due to the dispersed character (time, space), shortage of transport capacity at one place or period, might go

together with excess capacity elsewhere or at a different time. The relatively low occupancy rates signify that supply of

transport services is geared to maximum demand levels, which might be considerably higher than the low or average

demand levels. For instance, in case of harvest periods there will be a peak demand for certain vehicles, which will not be

there in other periods of the year.

26 Specific aspects of road freight transport 1999-2003, Statistics in Focus, January 2005, Eurostat.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 3.2

Empty running of road hauliers (in % of vehicle kilometres, 2003)

National (average 33%)

International (average 16%)

Source: Eurostat; Statistics in focus – Transport (1/2005)

Use of other vehicles

A transport operator could decide to improve the efficiency of his transport operations by
(partly) replacing his vehicle fleet by larger and more cost effective vehicles, with the aim
to improve the load factor and/or the fuel efficiency. Medium and large transport
companies also have the possibility to use other larger vehicles in there fleet to carry out
certain transport operations in order to improve transport efficiency. Although transport
costs per vehicle may be higher, the average payload weight will increase as well, which
will result in lower costs per tonne-kilometre.

Although this is certainly a realistic option for medium and large transport companies, it
is not for driver-owners with just one lorry. The decision of partly replacing the vehicle
fleet is normally made to improve transport operations on the medium or long run. Hence
the fact that it is not realistic to expect a transport operator to replace his fleet in periods
of suddenly increasing transport costs, a transport operator may decide however to
replace his vehicle fleet sooner in periods of substantial increasing transport costs (i.e.
due to steep rising fuel prices).

Cut down other operating costs

A transport operator could also try to cut down his operating costs in order to safeguard a
certain profitability level. Fuel costs and labour costs are the two most important
components of the total transport costs representing 60-70% of it. Cutting down labour
costs is an option for the medium and long term, but, as drivers usually have long term
contracts, is no realistic option on the short term.

In the longer run, though, a strategy to reduce labour costs can bring positive results. In
particular in the recent period of high competition in the international freight market,
companies are finding ways to employ, directly or indirectly, drivers at lower costs (for
instance for countries with lower wages within the EU).

Fuel costs could be further reduced through improving the drivers’ behaviour (i.e.
through special driving courses or fuel saving projects). On international trips road
hauliers could cut down fuel costs by buying cheaper fuel in countries with low diesel

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

prices. On trips to and from the UK, where diesel prices are amongst the highest in
Europe, this can save a lot of costs. Operators from outside the UK can avoid paying high
UK fuel prices by filling up before they arrive. Foreign articulated vehicles can each
bring in about 1200 litres of diesel, worth £ 300 on average

. Most transport companies

however, will already buy cheap fuels on international trips, and it appears that that this
possibility of cutting down transport costs leaves not much room for further
improvements. Besides, there is a maximum amount of fuel a road haulier may carry
when crossing certain borders.

Reduce profit margin

Last, but not least, in practice higher transport costs are also absorbed in lower profit
margins, as shown before. Of course, such a reaction is only a short term solution, as it
threatens the continuity of the company in the long run if no money is available for the
necessary investments. However, in some segments of the market such reactions may
take place, for instance in the owner-driver segment. Such operators usually work rather
on a cash flow that full cost basis, which makes that profit margins could be reduced for
longer periods, as long a net cash flow is produced which is sufficient to survive.

3.1.2

Inland shipping companies

The relative ly high price of gas oil in 2004 en 2005 has lead to reactions of vessel owners
in France

and the Netherlands

. The poster ‘Gas oil is expensive; 20% of

the freight price is enough, be aware of the cost price!’ underlines the
importance of high gas oil prices and the influence of it on the ship
owners’ revenues. Most of the ship owners have transport contracts with
shippers and shipping offices including a special gas oil clause, which
enables the ship owner to charge extra fuel cost on his clients. There are
also a lot of ship owners however, who are dependent on the daily spot
market for prices, which makes it difficult for them to negotiate the right prices with their
clients.

In a poll (held in September 2005) about ‘who pays the high gas oil price’

, 40% of the

ship owners replied that they would pay this price and bear these extra cost. The extra
cost for fuel are seen by some shippers and shipping offices as negotiable , while these are
cost for the ship owner and not part of the (negotiable) freight tariffs. The shipping
offices close forward contracts with industries and charter vessel capacity from individual
ship owners. The ship owner is dependant on these shipping offices and has to negotiate
the possibilities of passing on substantial increase in gas oil prices with them. A ‘bunker
surcharge’ in periods of price hikes in gas oil is not for all shipping companies practice
yet.

Some inland shipping companies equip their vessels with a new technology called A-

The Burns report – Freight taxes inquiry, November 2005.

In: ‘Operation escargot on the Seine’ to protest against the high fuel prices (October 2004).

In: Vaartpeiling, Who pays the expensive gas oil?

http://www.vaart.nl/peiling/0507.htm

, (September 2005).

The poll was held in the Netherlands, approximately 600 Dutch ship owners replied to this poll.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

tempomaat. The A-Tempomaat advises the vessel owner on the most economic position
of the throttle and how to use engine power, so it lowers fuel consumption without
lowering productivity. In times of high gas oil prices the introduction and application of
such new technologies might be speeded up, and can be an investment which pays back
for the (large) inland shipping companies with vessels. It will also contribute to a better
environmental performance of the vessel.

Like road transport companies, higher transport costs could also be levelled off by
improving load factors and cutting down on other cost components. If higher transport
costs cannot be charged to customers, or absorbed in higher efficiency of operations (low
fuel use, higher load factor), they will necessarily be reflected in lower profit margins.
This option, clearly being a short term solution, may be followed by the owner/captain
type of operations. As in road trucking, part of the supply of transport services stems from
small family type business which operate only one vessel. They can operate to some
extent on a cash flow basis and wait for better, e.g. higher freight rate, times.

3.1.3

Railway operators

A drastic increase of fuel costs can lead to an increase of rail freight transport costs,
particularly in the case of diesel-powered trains. As the transport costs have decreased,
among others due to cost reductions and efficiency improvements following increased
competition, the impact of fuel price increases has been limited in recent years. However,
as competitive conditions are now extremely difficult for rail operators, the latest fuel
price increases can bring the operators (in particular those operating diesel traction)
further into problems.

Railway operators usually pass on these cost increases to their customers, as can be seen
in the example of the private railway operator ERS (European Rail Shuttle) in the text
box below. However, as in road transport, rail freight operators might not be able to pass
on all increases and can seek for other cost reduction measures.

On short term, many operators have very limited options to react. Rail freight production
models are relatively inflexible. An increase of load factor or a combination of clients and
cargo for instance cannot be realised as easily as in road transport or inland shipping.
Stimulating more energy-efficient driving behaviour is one of the few options that exist,
but the development of this tool is still in its infancy stages.

In order to compensate for the extremely high prices for diesel oil, ERS (European Rail Shuttle) utilizes an

indexed fuel surcharge, based on the fuel price, which is published on a monthly basis, by one of the l argest

oil companies. This fuel surcharge is based on the standard price for gas oil and will be introduced on all

ERS services. The surcharge is calculated as a percentage on the freight costs. It is applicable as from 1st

of January 2006 transport date. The surcharge is an index -based surcharge system, whereby 0.60 Euro per

litre is the starting point. ERS applies the monthly average of two months prior to the current month, to

determine the surcharge applicable for the current month. In other words: the January 2006 fuel surcharge

is based on the monthly average of November 2005.

Source: ERS website (

http://www.ersrail.nl/

)

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Some railway operators have a stronger market position, due to specific market or
geographic conditions. For instance the railway operators in the Alpine region will have
more options for tariff reactions. In fact, adaptations of rail freight tariffs are not only
related to costs, but to a large extent also to market conditions (‘price discrimination’).
Very often, railway companies adapt their tariffs to the prices of road transport and inland
shipping. When road taxes were introduced in Germany (Maut), the tariffs for some rail
freight services through Germany and Austria were increased as well.

On longer term, the purchase of new, more energy efficient, locomotives or a shift from
diesel to electric traction are two options for the operators. Due to the fierce competition
however, the purchasing power and willingness to invest is presently very low. The
expected drastic increase of the prices for the use of the rail infrastructure will add to the
worrisome conditions in this sector.

3.1.4

Short sea transport operators

Short sea transport operators have very few options in the short run to deal with higher
transport costs caused by oil price hikes. In many cases the Bunker Adjustment Factors
(BAFs), which are used in deep sea operations, are not applied in short sea operations.
The reason is that short sea operations to a large extent compete with overland road and
rail links, modalities that are also hardly able to apply fuel surcharges. During periods of
extreme oil price hikes smaller companies in the sector could be forced to withdraw from
the market. Bunkering costs form a substantial part of the total operating costs: an
estimated 20% for short sea operations. For larger companies that offer services which
compete less with overland road or rail links, it will be easier to apply fuel charges. The
box below presents an illustrative reaction from the company Stena Line.

High oil price creates problems for the transport sector - Stena Line Freight forced to adjust prices

The price of oil has more than doubled recently. The knock on effect across almost every industry has been

significant, with the transport industry in particular suffering more than most. As an integral part of the transport

chain Stena Line is also affected by the price rise with fuel costs that have more than doubled. To handle the

higher costs Stena Line Freight will, from next year, significantly increase the current fuel surcharge. The price

model will be flexible, which means that the price will follow the trend of the oil price. Stena Line will also actively

work on a number of initiatives to cut energy and fuel consumption to minimise the dependency on oil.

Stena Line

Göteborg, Sweden, 10 October 2005

In cases that BAFs are being applied, estimates are that shipping lines are thus able to
recover about half of the rise in fuel costs. An additional problem of regaining excessive
fuel cost by means of BAFs is the delay of some weeks, up to a few months. Especially
smaller companies may be vulnerable to this effect.

Over a longer period rising fuel oil prices can speed up the process of shipping companies
replacing old vessels by new ones, with engines that consume heavy oil instead of marine

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

diesel oil. This will reduce their bunker costs enormously

. Unfortunately, a negative

side-effect is the higher discharge of poisonous gasses like SO

. As oil prices are rising

sharply at present, the process of replacing old vessels by new ones, or at least old
engines by new engines, might be speeded up again.

3.1.5

Airfreight operators

Generally, airfreight operators are very large companies like the airlines KLM/Air
France, Lufthansa and BA and express companies like DHL, UPS and TNT. On the short
term, all companies react with fuel charges. During the last hike, the charges were
extremely high and in some cases even exceeded the net transport fare. Opposition to
theses charges from the shippers and airfreight forwarders did not exist, but recently some
protests against the height and lack of transparency of these fuel charges were reported

As fuel costs are a substantial part of the airfreight transport costs, the need to look at cost
reduction is imminent in periods of price hikes. Cost reductions on the operational level
are realised by improving productivity, increasing the efficiency of processes and further
reduction of labour costs. On the longer term airline companies will invest in more energy
efficient airplanes (see also paragraph 5.1).

Hedging

Air companies can insure the risk of price fluctuations in oil prices by hedging practices.
KLM for instance has covered in 2004 67 % of its total demand for jet fuel by hedging.
Due to the sharp increase of oil prices in this year, the net benefit of this practice was 49
million Euros, thanks to the development of the fuel price and the USD-EUR rate
development.

In recent years European airlines have been forced to review their fuel hedging policies,
as rises in oil prices have forced them to lock in hedging contracts at very high levels or
else to gamble on crude oil prices retreating.

Many carriers cut down on hedging volumes after the first year of the second Iraq war,
which left them exposed to oil prices which later surged by more than a third in the fist
half of 2004. Shares in one low-cost airline (Ryanair) fell in August 2004 after they
warned that they had only hedged against oil price rises until October of that year.

The situation is worse for long-haul airlines that are battling a general global downturn.
Scandinavian airline SAS decided to resume hedging after being left exposed in the first
quarter of 2004. A fuel surcharge they had imposed earlier in 2003 was no longer
covering increased fuel costs. The high volatility of crude oil prices led them to
investigate the benefits of hedging.

Source: Systeem voor kostenallocatie van haven ontvangstinstallaties, April 2002, ECORYS.

Nieuwsblad Transport, 15-11-2005

In finance, a hedge is an inves tment that is taken out specifically to reduce or cancel out the risk in another investment.

Hedging is a strategy designed to minimize exposure to an unwanted business risk (i.e. sharp rising oil prices), while still

allowing the business to profit from an investment activity.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

On the other hand, Swiss International Air Lines suffered losses after selling hedges to
boost cash reserves. They continued with the strategy of remaining unhedged, expecting
oil prices to recede. This airline calculated that annual costs would rise about 4 million
Swiss francs (USD$3.12 million) for each one percent rise in the price of crude oil.

In general, airlines which are without hedging during times of rising oil prices face two
choices: locking in before oil rise higher or sit tight and hope prices fall. As mentioned
before, Ryanair decided on sitting tight, claiming that it had sufficient cash reserves to
keep them strong (they’re riding out the storm, taking the gamble ).

Other big carriers such as Lufthansa and British Airways announced fuel surcharges in
2004 on fares in an attempt to counteract high oil prices. Both these airlines however had
also hedged. For example, British Airways had hedged 45 percent of its fuel for the year
2004 at USD$28.50 a barrel of crude. Lufthansa was one of the most comfortably hedged
major airlines. It had hedged about 89 percent of its fuel requirements for the year 2004
and 35 percent of fuel needs for 2005.

Some analysts say European airlines hedge more than their American competitors.
According to JP-Morgan, nearly all the European carriers had some kind of fuel price
hedging in place, which was markedly different picture to that of their US counterparts,
many of whom had none at all now. An example is American Airlines who announced in
August 2004 that it would spend as much as USD$400 million in added fuel expenses
that year as a result of soaring oil. In their case each cent rise in a gallon of jet fuel added
around USD$33 million to its yearly costs.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

3.2 Reactions by the users of freight transport services

3.2.1

The impact of transport costs on costs of production and consumer products

There is a large variation in users of freight transport services, from industrial shippers
like the chemical industry, food industry or automotive industry, via wholesalers, to
retailers who deliver consumer products at home. The reaction of these users on increases
in fuel prices depends on the impact that an ensuing rise in transport costs might have on
their own activities. In general expensive products or high value added activities can bear
more easily higher transport costs than low value products or low value added activities.
Further, the impact of increasing transport costs is relatively modest, if transport costs
have only a minor share in the total logistics costs (including costs for warehousing,
assembling and administration). The next paragraph assesses the impact of rising
transport costs on the total logistics costs of companies.

Share of transport costs on total logistics costs

Since the second half of the eighties, the share of total logistics costs in the production
value of companies has been decreasing, from around 12% in 1987 towards 8% in 2003
(a small increase is expected during the next few years). Transport costs as part of the
total logistics costs have been decreasing as well, from 5.9% of production value in 1987
to 2.6% in 2003 (see figure 3.3; the information is based on a survey

amongst

approximately 2000 companies in 18 European countries).

Thus, whereas transport costs were some 50% of total logistic costs in 1987, they reduced
to about one third in 2003. At the same time, total logistics costs reduced by one third in
elation to the value of commodities. In 2003, the share of transport costs in the total
production value was rather small (2.6% in 2003). An increase in the price of diesel by
40% will lead to an increase in transport costs of 8-12% (assuming a 20-30% share of
fuel costs in total transport costs); with such an increase in fuel costs, total transport costs
would rise, but still be less than 3%. The effect on total logistics costs would thus be
modest.

Insight to impact, A.T. Kearney, 1999; European Logistics Association (ELA), 2005.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 3.3

Total logistics costs and its components as % of total production value of companies (based on a survey in 18

European countries)

Value added services
Packaging / embalage

Transport
Storage

Warehousing

Administration

Source: ELA / A.T. Kearney.

The impact of rising transport costs on final products

Prices of final consumer goods are in general higher than prices of semi-finished or raw
materials. Our daily or weekly shopping at the local supermarket provides a good
example of what final consumer goods can bear in terms of transport costs. The share of
transport costs in some specific supermarket articles is presented hereafter.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 3.4

Transport costs as share of final consumer product prices (EUR, price level 2001)

0,52

5,85

1,78

3,52

0,10

0,04

0,02

1 liter milk

1 kg pork

5 kg potatoes

0.5 kg coffee

Product price (excl. TC)

Transport costs

Source: Maatschappelijke betekenis van het goederenvervoer, case beschrijvingen (ECORYS, 2002)

The share of transport costs in these four specific food products is low, varying between
0.7% and 2.8% of the final consumer prices of these products. As a consequence rising
fuel costs resulting in higher transport costs, affect final consumer prices of these
products only very slightly. In the text box below, an example of a company’s perspective
on the relation between transport and fuel consumption is presented.

The Coca Cola example (Source: Environmental Report 2004, the Coca Cola company)

Our 2004 fuel economy ratio suggests that, on average, our system’s transportation fleet consumes
approximately 10.5 liters of diesel per kiloliter of product delivered. In 2004, we estimate that greenhouse gas
emissions from our fleet were approximately 2.85 million metric tons. This represents a reduction in fuel
efficiency. In 2003, our system’s fleet ratio was approximately 7 liters of diesel per kiloliter. Our estimated
greenhouse emissions were 1.8 million metric tons. The increase in gas emissions from 2003 to 2004 is based
on numerous factors. One factor is the expansion of the data set to include four entries by high-fuel- consuming
fleets. With these additional fleets, however, all of our geographic divisions are represented in 2004 data rather
than just 17 out of the 21 organisations in the 2003 data set.

The previous estimates, which demonstrate that rising transport costs have rather small
impacts on industries and final consumers, are average figures of course. The impact of
increasing transport costs through sharp increases in fuel costs might be considerable for
certain sectors or clients. This will be illustrated by some case studies which have been
carried out recently in the SULOGTRA project.

Impact of higher transport costs on industrial sectors

The impact of substantial changes in transport costs on industrial sectors has been
assessed previously in the SULOGTRA-project

. The developments in transport costs in

this project have been based on Delphi Survey

, as part of the TRILOG-study

. The

35 SULOGTRA - Effects of trends in logistics and supply chain management on transport (5th Framework Programme); Work

Package 6 report – Analysis of value creation in supply chains, November 2001.

36 Full Report of the Delphi 2005 Survey; European Logistical and Supply Chain Trends: 1999-2005; A.C. McKinnon and M.

Forster, July 2000.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

panel consulted in the survey was expecting freight rates of road freight transport to
increase by 12% (real terms) in the period 2000-2005. Freight rates for rail and inland
waterway transport in comparison were expected to remain at the current level
respectively or decline by 1% (real terms). The 12% increase in transport costs was used
in the SULOGTRA-project to assess the macro economic impact in a first scenario. As a
second scenario, an increase of 24% in transport costs up to 2005 was assumed.
Subsequently, the impacts

were calculated for the industrial sectors food and beverages,

building materials, chemicals, machinery and automotives only. The actual impact
analysis has been assessed with the SMILE-model (SMILE stands for Strategic Model for
Integrated Logistics and Evaluation)

, which represents the situation for the Dutch

economy only. The outcomes of the analysis are presented in the next figure.

The main conclusion that can be derived from this analysis is that the impact of rising
transport costs on the five industrial sectors is relatively low. The impact is more
substantial of course in the scenario where transport costs would rise with by 24%. There
are sector differences however. The largest slowdown of the growth of a sector
(compared to the base case) is visible in the Chemicals sector. In this sector a 24%
increase of transport costs results in a 3.6% lower value added in 10 years

time (see

figure 3.5: “chem. base” = index 165.6 versus “chem. +24%” = index 162.0). The
smallest effect of a transport cost increase is visible in the Building Materials sector. A
24% increase in transport costs results in a 1.2% decrease in the growth of value added in
a period of 10 years (see figure 3.5: “BM base” = index 130.3 versus “BM +24%” =
index 129.1).

37 TRILOG-consortium: TNO (Netherlands), Heriot -Watt University (UK), NEI (Netherlands), Cranfield Centre for Logistics and

Transportation (UK), Chalmers Institute for Technology (Sweden) and LaTTS (France).

38 The impact has been measured in terms of macro-economic parameters like production value, value added and

employment.

39 The SMILE-model has been developed by ECORYS (former NEI) and TNO.

40 Base year of the SMILE-model is 1995, for this reason the analysis considers the period 1995-2005.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 3.5

Impact of higher transport costs on industrial sectors

Development in Value Added 1995-2005 (index 1995=100)

122,9

122,0

121,1

130,3

129,7

129,1

165,6

163,7

162,0

160,5

159,1

157,7

116,3

114,9

113,6

F&B base

F&B +12%

F&B +24%

BM base

BM +12%

BM +24%

Chem base

Chem +12%

Chem +24%

Mach base

Mach +12%

Mach +24%

Auto base

Auto +12%

Auto +24%

Auto = Automotive sector

Mach = Machinery sector

Chem = Chemical sector

BM = Building Materials sector

F&B = Food and beverages sector

Source: SULOGTRA -project (FP5)

3.2.2

Price elasticities

Another way to assess possible reactions of shippers to changing fuel prices is to look at
price elasticitie s of demand

. Since the first oil crises many studies have been performed

that have dealt with the relation between fuel prices on the one hand and fuel
consumption, traffic levels, fuel efficiency and car sales on the other hand. Although most
studies were either for cars only or for cars and lorries added together, some conclusions
for commercial traffic can be drawn.

Short term reactions of shippers

In 1991 ECORYS

performed a study on the price (and income) elasticity of the demand

for fuel. For this study around 40 published studies were analysed. In 2002 the ESRC

did the same by analysing 69 different published studies.

Elasticity is the proportional change in one variable relative to the proportional change in another. For instance, a 1 %

increase in fuel price leads to a 0.1 % short-term decrease in vehicle-km.

ECORYS/NEI, “Elasticiteiten van de vraag naar brandstof ”, 1991.

ESRC Transport Studies Unit, University College London, ‘Review of income elasticities and the demand for road traffic’,

Mark Hanly, Joyce Dargay, Phil Goodwin, March 2002.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Both studies found that if the real price of fuel goes up by 10% (and stays) the following
adjustments take place in the short term (within about a year):

a) The number of kilometres travelled will go down by around 1%-2%;
b) The volume of fuel consumed will go down by about 2 to 3% ;
c) The total number of vehicles owned does not or changes only minor (< 1%);
d) Fuel efficiency goes up to a maximum of 1.5% within a year.

In the short term higher fuel prices have about the same effect on fuel efficiency and
mobility: mobility decreases with around 1.5%, fuel efficiency goes up with a maximum
of 1.5%.

These elasticities are confirmed by the la test study from the European Environmental
Agency (EEA 2006), The figure below presents the elasticities from this report.

Figure 3.6

Elasticity of transport demand with respect to fuel price

In these studies there was not sufficient information to calculate the effect of higher fuel
prices on freight transport separately. ECORYS found three studies that analysed the
effect of higher fuel prices on the freight transport. It was concluded that for freight
movements demand elasticities are lower, both on the short term as well as on the long
term. This can be the result of freight transport being more ‘necessary’ for welfare
creation (and thus less price sensitive) than passenger transport.

ESRC found that the effects of a price increase for diesel plus petrol causes a smaller
reduction in the total amount of fuel bought, than for petrol alone. Secondly, the effect of
an overall fuel price increase has a smaller effect on the total traffic level (including
lorries) than petrol prices have on the private car traffic. Although not all goods vehicles
use diesel and not all cars use petrol, these two examples suggest that goods traffic is less
sensitive to price changes than passenger transport by private car.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Longer term reactions of shippers

In the long run (about three to five years) both the previously mentioned study of
ECORYS and ESRC found the following effects of a real price increase of fuel with 10%:

e) The number of kilometres travelled will go down by around 1%-3%;
f) The volume of fuel consumed will go down by about 6% to 10%;
g) The total number of vehicles owned reduces with 1%-2.5% ;
h) Fuel efficiency goes up to around 4%-6%.

It can be concluded that in the long term higher fuel prices are a stimulus to buy fuel
efficient cars, the relative effect on the fuel efficiency is bigger than on car mobility
(kilometres travelled). Higher fuel prices therefore lead to the use of more fuel efficient
cars in the long run and to a much lesser extent to a decrease in mobility. Again these
conclusions are for the greatest part based on studies that looked at the demand for fuel
by private cars. Based on the few studies that also considered lorries it was concluded that
the above mentioned elasticities were lower for lorries, both on the short term and the
long term.

International comparisons of long-run response of diesel fuel demand to price changes
based on OECD and IEA country data for the mid 1980s indicate elasticity to be around
-0.4. This is consistent with the long-run elasticities calculated using the IEA world
energy model. Time series data for 22 OECD countries in the late 1980s indicate short-
run diesel fuel demand elasticities with respect to fuel price in between -0.3 and -0.35.
These figures are averages, and the variation over time and between countries is
considerable. It should be noted that price of, and demand for, commodities, including
oil, coal, steel and cement, is likely to be affected by the same world market changes that
influence the price of diesel fuel, which means that price effects may not be caused by
changes in the cost of freight transport only

Synthesis

Based on the different studies to the effects of changing fuel prices Dix and Goodwin

came up with the ‘reconciliation-hypothesis’. On the short term fuel price changes will
only result in relative minor changes in mobility that in turn lead to only minor changes in
the fuel consumption. In the longer term however fuel price elasticity increases due to
decisions to buy more fuel efficient cars resulting in decreasing demand for fuel without
loss of mobility. As a result mobility will hardly change. Although not analysed yet, it is
expected by Dix and Goodwin that in the longer term the elasticity of the numbers of
kilometres travelled can increase if decision on work/living location and lifestyle are
influenced (assuming rational behaviour).

3.2.3

Possible impacts on modal split

Given the expected effect of high oil prices on transport costs in the various sectors, it
could be expected that shippers would prefer the mode which is potentially least affected

‘CO

emissions from road vehicles’, OECD, Paris, 1997.

‘Petrol prices and car use: a synthesis of conflicting evidence’, M.C. Dix, P.B. Goodwin in Transport policy and decision

making, Vo.l.2, No. 2, 1982, page 179-195.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

by such price hikes, i.c. the rail sector. As the share of the rail sector has been declining in
rail movements, such a response, however, is generally not seen. Nevertheless, there are
some examples of companies and industries having rearranged their distribution
activities. In particular in the car industry a shift has been made to making more use of
rail transport (e.g. the Audi factory in Györ, Hungary). It is difficult, though, to relate
such changes to oil price sensitivity only.

For products with a high value-density (like consumer goods, often transported in
containers) the share of transport costs in the total product value is very low. A shift from
road to rail and inland waterways for containers can be expected when fuel costs rise,
although the role of other quality elements is of higher importance. The development of
container services over inland waterways in the Netherlands and Germany has shown that
even for high value goods transport costs may play a role in the modal choice. When the
first attempts to set up such services were made in the Netherlands in the mid-eighties,
very few believed in the feasibility of such services. It nevertheless turned out to be a
success, even though it started in a period with relatively low oil prices. The link with oil
price shocks can thus also in this case not be made directly, in particular since the costs of
inland waterway transport, like road transport, are relatively sensitive to oil price changes.

In the case of low-value goods (e.g. sand, minerals and liquid bulk) the impact of
transport costs on prices is much higher, but such markets are usually rather captive,
meaning that the difference in quality of costs with other transport modes is such that
modal shift effects are not likely, or even impossible . In this case increases in the
transport costs may more easily be passed on to the client, captivity giving market power.

However, even in this market sector examples can be found of industries changing their
distribution patterns towards more fuel efficient modes, although it is not clear what role
fuel costs have played in this. A Dutch supplier of salt (Nedmag Industries) has decided
to store its products in condensed form in different regional depots. In these regional
depots products are further processed (diluted) and delivered to the local clients. This has
resulted in larger but more concentrated transport flows from the central depot to the
regional depots, which is to the advantage of inland shipping. Instead of carrying diluted
salt in tankers by road, the condensed salt can be carried by vessels, which will result in a
reduction of around 1.8 million tonne-kilometres.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

3.3 Conclusions on the impacts and reactions in freight transport

Reactions by transport services providers

It has been described in chapter 2 that the different freight transport modes are affected in
different ways by increases in oil prices. This chapter has provided insight in the way the
operators are capable to pass on price increases to their customers.

There is considerable difference in the ability of transport operators to pass on the higher
costs of fuel to their customers. Whereas in aviation the practice of surcharges is widely
used, such price revisions are to a lesser extent used in road transport. In rail transport,
where the impact of oil prices on costs is smaller, steps are taken to introduce such
surcharges. In short sea shipping the possibility to pass on cost increases directly to
customers is presently low and also in inland waterway transport this is not a regular
reaction, even though a large minority of operators would start negotiating adjustments to
freight rates.

Other options to absorb higher fuel costs are increasing load factors (in particular in road
transport), rearranging business as to make more use of cheaper labour (road transport),
or economising on fuel use (inland waterway transport) and other operating costs (all
sectors). In the longer run operators can influence their fuel use by shifting to more fuel
efficient engines (short seas, inland waterways) or higher capacity vehicles (road
transport).

The ability of transport operators to pass on the higher costs of fuel to their customers
strongly depends on the market power they have. The next figure presents an overview of
the relation between market power and the level of affection by oil prices.

Figure 3.7

Relation between oil prices affection and market power

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

The X-axes gives a relative insight in the market power of the operators. The Y-axis
represents the way companies are affected by prices. As the market power can vary
substantially within one group of companies, a range is presented per mode. Small
transport companies in road, inland shipping and short sea transport have substantially
lower market power than large companies like the third-party logistics providers. From
this figure it can be concluded that road freight transport operators, inland waterway
operators and short sea shipping companies will suffer the most from price hikes, which
is reflected in the low profitability in these sectors.

Reactions by users of freight transport services

The demand for freight transport does not seem to be influenced to a large extent by
increases of oil prices. The fact that the price of transport is only a very small part of the
final price of goods is an important explanation. Moreover, freight transport in general
and road transport in particular has increased its productivity substantially in the past
decades. The price of transport has hardly increased, whereas the influence of wages and
infrastructure charges influence the price of transport to much higher extent.

There are sectors, however, in which the influence of transport costs on demand for
transport services is much higher: the cases that have been presented show that there are
differences between different segments, with relatively higher (but still modest) impacts
in the chemicals and automotive industries.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

4 Impacts and reactions in passenger transport

This chapter explores the reactions of providers and users of passenger transport services.
In this case there is an obvious distinction between individual transport, by means of
passenger cars, and common transport means such as railways, aviation and public
transport. In particular the relation between costs and tariffs may be different, depending
on the type of market, which would lead to the expectation of quite different price
changes and therefore reactions.

4.1 Reactions by providers of passenger transport services

4.1.1

Local public transport providers

In general terms, urban public transport services have been moving towards:

•

A growing use of electric means of propulsion: urban trains, subway, light railway
and trams.

•

A movement, still rather modest and in part motivated by environmental reasons,
from gasoline to natural gas and hydrogen in conventional means of land transport.

•

A growth in intermodality, combining means of transport, which for many years were
developed and managed independently. This has led to the organisatio n of urban-
metropolitan consortiums (and other similar bodies).

•

Lately, small adjustments in the cost-tariff relation are arising, with the suppliers
tending towards increasing the part of costs covered by the users, keeping in mind
limited price elasticity, with the intention of reducing the burden on public funds.

In general fuel costs represent a little part of the operational costs public transport. By this
energy efficiency is not a very important topic in de process of decision-making for new
transport vehicles. Decisions about fuel efficiency are more often inspired by the impacts
of clean and efficient engines on the environment, instead of by cost impacts.

4.1.2

Railway passenger transport providers

The railway sector is in many countries managed by (former) public organisations. For
this reason, reactions to increasing energy cost issues are directly conditioned by the
public energy and transport policy (government policy). This also means that the railway
infrastructure policies are developed to support their own service. Under this scenario, the
market plays only a subordinate role, which with regards to costs means that the impacts
from the rise in the energy prices is influenced heavily by the strategies and objectives
announced by the Civil Service and applied by the competent Public Administrations.
Under these conditions, the repercussion of the energy costs and the general operation

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

costs are issues of lower importance, just like with local public transport. Besides,
electricity is the main ‘fuel type’ for trains, so higher oil prices do not automatically mean
higher fuel costs for railways.

The costs structure at RENFE in 2004 shows clearly the little importance of energy costs:
energy makes up 5.6% of the total costs (personnel costs and the supply of materials and
services represent 67%) with a difference of 0,18 with respect to the year 2003. This
happened after a 10.2% rise in the price of energy (Annual Report 2004 – RENFE)

4.1.3

Air transport operators

The air transport operators have used three types of strategies to deal with fuel price
increases in a changing global context in which two other key factors have been
important: the liberalisation of air travel markets and the increased competition with Low
Cost Carriers (LCC). The three types of strategies comprise:

•

Rebuilding the fleet and incorporating more energy-efficient planes.

The demand directed by the operators towards the aeronautic industry has received
adequate responses. The main changes that occurred are:

Ø the motorisation of planes has been improved (since the first big energy crises in

the 1970s), resulting in an improved energy performance per unit;

Ø At a later date, the size of the planes increased which resulted in better energy

performance per seat-km.

•

Retaining and complementing public funding.

For principally historic reasons closely-linked to the national sovereignty of air space, a

basic parameter in the development of commercial aviation has been the combination of
state competence to grant flight authorisations and the reciprocity between states to act in
this regard. This has constituted and to a large degree still does, intervention unrelated to
market conditions that allows many companies to maintain positions of advantage in
certain markets. These positions, often from a monopoly on the services within the
borders of a state and from a duopoly on airlines between two countries has, for a long
time, enabled companies to maintain high prices of services and to rebound increases in
costs.

In order to keep up with the increase in demand and the greater average size of the
planes, the (in most cases public) airport authorities have increased investment in
infrastructure (new terminals, new runways) and in installations and automatic
equipment for the rapid dispatch of planes, passengers and cargo.

Finally, with the proliferation of small companies and especially of Low Cost Carriers

many small regional airports (2

and 3

level) are beginning to increase their share

within the airport systems. This transfer, in principle associated with less saturation and

RENFE has reported an increase of 4,3% in the number of passengers transported in 2005.

The price policy has allowed a considerable increase in the average occupation rates of flights so that the best performance

per seat -km has been reflected in greater performance per passenger-km.

In par. 2.2.8.it can be seen that airport and flight taxes are more of a burden for LCC’s (30%share in total cost) than for

traditional companies (6% share in total costs). This explains the growing tendency for LCC’s to operate on regional

airports where taxes are normally lower.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

the easy availability of slots, is accompanied more and more by direct or indirect forms
of subsidisation from the regional and local authorities

•

Redefining the business model

Redefining the business model has resulted in:

Ø Expansion of the market through the supply of services for new demand

segments in which the lower price level plays an essential role. This greater
business scale enables operation costs and energy costs in particular to be better
absorbed.

Ø Supply differentiation in accordance with the price elasticity of demand, so that

low prices for high elasticity segments and higher price levels for low elasticity
segments are combined more and more.

Ø Increase in the sale of electronic tickets (e-tickets) that enables running costs to

be reduced, whether by reducing the number of ground staff or by reducing
commissions paid to travel agencies. The saving of e-ticketing is estimated at €
10/ticket (in 2005)

Ø General reduction of non-energy costs, particularly of flight crew and ground

staff. Reduction in the non-energy costs makes it possible to absorb the higher
energy costs. Since 2000 the AEA companies

have cut down their staff with

32,000 people (the 8%).

Ø Reduction of onboard services.
Ø Establishing alliances on a worldwide scale which, in part, is one way of avoiding

the difficulties of acquisitions, mergers, etc. The One World, Star and Skyteam
alliances embrace the bigger companies (in IATA). They promote shared
strategies formulated mainly to meet the supply excess and to the growing Low
Cost Carrier competition.

Ø An increase in the number of companies that operate in the margin, with

“abnormally low” costs and fewer guarantees of security

There is no available information on these kind of grants. The press has published some reports about these regional and

local practices in several countries. The reports are focused in the different airport fares between these airports and the rest

into the network. Only some small companies are benefiting themselves of these favour deals.

Source: IATA. At the beginning of 2005 93% of the Iberia tickets were electronic.

Airlines European Association (AEA) comprises the following companies: Adria Airways, Aer Lingus, Air France, Air Malta,

Alitalia, Austrian, BMI, British airways, Cargolus, Croatia Airlines, Czech airlines, Cyprus airlines, Finnair, Iberia, Icelandair,

Jat Airways, KLM, LOT Polish airlines, Lufthansa, Luxair, Malev, Olympic Airlines, SAS, SN Brussel Airlines, Spanair,

Swiss, TAP Portugal, TAROM, Turkish airlines, Virgin Atlantic.

The European Commission has published a list of airlines companies with abnormal procedures.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

4.2 Reactions of users in passenger transport

This section considers the reaction of owners of private cars and users of passenger
transport services on higher transport prices. The first sub-section describes some general
developments with respect to the passenger car fleet. Subsequently , attention is paid to
developments in car expenditures from households and finally some short and long term
reactions are described. The second sub-sections deals with the reaction of users of
passenger transport services.

4.2.1

Reactions by car owners

A growing car park

As described in chapter 2 crude oil prices, expressed in real prices, have tended to
increase significantly in the period 1995-2004. At the same time the number of motor
vehicles in use has increased steadily in all the EU-15 countries (see table below).
Between 1995 and 2002 the number of passenger cars in the EU-15 increased by 16
percent from 160 million to almost 190 million passenger cars.

Table 4.1

Development of car park in EU-15 (1995-2002) - motor vehicles (x1000) in use

1995

1996

1997

1998

1999

2000

2001

2002

AUSTRIA

3.594

3.691

3.783

3.887

4.010

4.097

4.182

3.987

BELGIUM

4.239

4.308

4.373

4.458

4.547

4.629

4.684

4.725

DENMARK

1.685

1.744

1.788

1.822

1.847

1.843

1.875

1.890

FINLAND

1.888

1.930

1.935

2.008

2.069

2.121

2.146

2.180

FRANCE

25.100 25.500 26.090 26.810 27.480 28.060 28.700 29.160

GERMANY

40.404 40.988 41.372 41.674 42.324 43.772 44.383 44.657

GREAT BRITAIN

24.307 24.865 25.594 26.269 26.775 27.185 27.790 28.484

GREECE

2.240

2.241

2.401

2.568

2.811

3.156

3.415

3.656

IRELAND

990

1.057

1.134

1.197

1.269

1.319

1.385

1.448

ITALY

30.301 29.911 30.155 31.056 32.038 32.584 33.239 33.706

NETHERLANDS

5.633

5.740

5.931

6.120

6.343

6.539

6.710

6.855

PORTUGAL

2.560

2.750

2.950

3.150

3.469

3.593

3.746

3.885

SPAIN

14.212 14.754 15.297 16.050 16.847 17.449 18.151 18.733

SWEDEN

3.631

3.655

3.701

3.791

3.890

3.999

4.019

4.043

EU-15

160.784

163.133

166.505

170.859

175.720

180.346

184.426

187.409

Source: ANFAC

From this, it seems that increasing oil prices have hardly any effect on the quantity of
passenger cars in society. Partly this can be explained by the higher energy efficiency of
passenger cars, which compensates for higher fuel prices. The figure below shows that
cars just like trucks and air planes have become energy efficient and this trend may
continue in the years to come.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Figure 4.1

Energy efficiency of cars (litres/km), trucks & light vehicles (toe per tkm) and air (toe per passenger) in EU 15

(1990-2003)

Source: ODYSSEE (a detailed database on energy efficiency data & indicators, for the EU-15 members and

Norway) to be found at

: http://www.odyssee-indicators.org/Reports/sectors_transport.html

However, at the same time the average power of passenger car engines has increased (see
graph below). This trend is very counteractive to the trend of increased fuel efficiency of
engines. In other words: the gains that have been obtained in making more fuel efficient
engines are not used for reducing the energy consumption, but for an increase of
performance. This shows that purchasers of passenger cars have been somewhat
insensitive for the fuel costs of passenger cars in recent years and those aspects like a
higher comfort and more powerful engines seem to be of more importance.

Figure 4.2

Average CC (cubic centimetres) of a motor in passenger cars in different European Countries

1.000

1.200

1.400

1.600

1.800

2.000

2.200

1990

1992

1994

1996

1998

2000

2002

2004

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

Sweden

United Kingdom

Source: European Automobile Manufacturers Association (ACEA )

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Long term impacts on vehicle choice

Three types of fuel are used by most passenger cars in Europe : petrol, diesel or LPG. In
many countries the share of LPG passenger cars is small and decreasing. For example in
The Netherlands the share in the registrations of LPG-cars has decreased from 2.7 percent
in 2000 to 1.1 percent in 2004 (source: RAI-Vereniging, 2005). Due to the small market
share of LPG cars, the remaining part of this section focuses on petrol and diesel.

Since 1990 the share of passenger diesel cars in the total passenger car fleet has increased
substantially in the EU15 (see table below). Its share in registrations has increased from
below 20% in 1990, via 22.6% in 1995 to 48.9% in 2004. This increase in market share
has taken place in all countries, although the size of the market differs a lot between
countries in Europe.

Table 4.2

Share of diesel cars in new passenger cars registration

% diesel by registriations

1990

1995

2000

2004

Austria

25.7%

42.8%

61.9%

70.9%

Belgium

32.7%

46.8%

56.3%

70.2%

Denmark

4.1%

2.9%

13.2%

24.2%

Finland

5.2%

6.7%

Missing

15.5%

France

33.0%

46.5%

49.0%

69.2%

Germany

9.8%

14.5%

30.3%

43.6%

Greece

Missing

0.7%

2.9%

Ireland

13.6%

15.9%

10.1%

18.3%

Italy

7.3%

9.9%

33.6%

58.3%

Luxembourg

21.3%

28.5%

50.4%

72.5%

Netherlands

10.0%

13.9%

22.5%

24.9%

Portugal

4.9%

10.7%

24.2%

56.9%

Spain

14.2%

33.6%

53.1%

65.4%

Sweden

0.6%

2.7%

6.3%

8.0%

United Kingdom

6.4%

20.2%

14.1%

32.6%

EU 15

Missing

22.6%

32.8%

48.9%

Source: ACEA (European Automobile Manufacturers Association)

The increasing market share of diesel passenger cars can be explained by a number of
reasons:

•

The number of passenger kilometres made by private car is still growing, which
makes it more interesting for the car owner to ‘switch’ to diesel fuelled cars.

•

Prices of diesel are lower than the prices of petrol

•

The improvement of diesel engine technology

In general a diesel engine is only attractive, concerning the costs of driving a private car,
when many (long-distance) trips are made. The fixed costs (depreciation, interest,
insurance, car taxes) are higher, while the variable costs (maintenance, fuel) are lower. As
the number of passenger kilometres travelled per car is still increasing, a diesel engine has
become more and more attractive in Europe. It also shows that a car owner is sensitive to
the variable costs of a passenger costs, and therefore also to the costs of a specific fuel
type.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

Expenditures on transport

Expenditures for transport consume a considerable part of household budgets. For most
EU-15 countries these expenditures vary between 11 and 15 percent of the total
expenditures.

Figure 4.3

Household expenditure on transport in EU-15 and AC-10, 1993-2004

Household expenditure on transport at current prices

1993

1994 1995 1996

1997 1998 1999

2000 2001 2002 2003 2004

% of household expenditure

AC 10

EU 15

Source: Eurostat

Based on the above figures it appears that the transport related expenditures of
households have raised slightly during the past decade. Nevertheless, in the period 1999-
2003, a period of rising oil prices, the figure shows a decline in transport expenditures of
households. The differences between the years are very small though.

Behavioural impacts of higher fuel prices

Economic literature states that a car traveller has roughly thee options when confronted
with higher prices:

1. ‘Simply paying the higher fuel prices’, so no behavioural change takes place;
2. Adjusting the pattern of trips;
3. Adjusting the pattern of activities which also includes adjusting the pattern of

trips.

The table below gives an overview of different behavioural changes and whether these
changes occur at the short (between 0-1 year), medium (between 1-3 years) or long term
(>3 years).

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

100

Table 4.3

Behaviour of car travellers with regard to higher transport costs

No behavioural change

Adjusting the pattern of

trips

Adjusting the pattern of

activities

Short term

Compensation higher costs

Passing through costs

Drop in demand

Medium term

Change of travel mode

Purchase other type of car

Change of leisure locations

Long term

Moving to another house

Moving to another location of

work

Hereafter these behavioural changes are considered in more detail.

No behavioural change
In this situation a traveller does not change his pattern of trips or his pattern of locations.
As fuel prices rise, the cost of mobility increase is putting an extra constraint on the
household budget (income effect). This will happen in the short term as a car owner will
not be able to change trips and activities.

Adjusting the pattern of trips
A rise of fuel prices could also lead to substitution effects. Here, rising fuel prices will
cause households to look for cheaper alternatives as substitution to the more expensive
fuels. This could result in consumers switching to other types of fuel (changing cars) or
by buying a more efficient or lighter car. Another option is to change to a different mode
of transport like public transport or travelling by bicycle. Finally car owners could try to
use their car more efficiently by increasing the occupancy rates or by travelling at more
fuel efficient speed.

Adjusting the pattern of activities
The most radical reaction is adjusting the pattern of activities. By choosing another
location of working, recreation or even of living, a car owner can reduce the number of
kilometres he travels, which will result in lower fuel costs. It may be clear that these
decisions most times can only be made in the long term.

Various studies point out that fuel price increases do not result in substantial behavioural
changes. For example , during the summer of 2005 fuel prices at the pump increased
substantially in The Netherlands. However, the Dutch Statistical Office and involved
sector organisations did not find evidence of lower demand for fuel from car passengers,
nor of less trips being made.

The Netherlands Environmental Assessment Agency

concludes that the price elasticity

for fuel consumption amounts to -0.15 in the short term, -0.3 in the medium and -0.6 in
the long term (above 10 years). Also in the medium and long term impacts are low. These
elasticities are in line with the previously mentioned study by ESRC and ECORYS (see
par. 3.2.2.). The analysis of over a 100 studies (in different EU-countries and the US)

At present a campaign in the Netherlands advocates more fuel efficient driving (“the new driving”)

RIVM, “Optiedocument verkeersemissies”, 2004.

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resulted in a price elasticity for fuel consumption of -0,2 in the short term and around -0,8
in the long term: on the short term fuel price changes will only result in relative minor
changes in mobility that in turn lead to only minor changes in the fuel consumption. In
the longer term fuel price elasticity increases due to decisions to buy more fuel efficient
cars resulting in decreasing demand for fuel without loss of mobility.

It should be noted that increasing costs for business trips are usually borne by the
employer, so for these trips a car owner may not be very sensitive for fuel price increases.
The cost of commuting trips are in various countries also borne by the employer (to a
certain extent), which makes that the travellers involved are also less sensitive to
increases in travelling costs.

The largest impacts of higher fuel prices may be expected for ‘non-business’ trips , as a
car owner bears the full costs of these trips. For example by buying a more efficient car,
recreating closer to his home, using other modes of transport, a car owner may try to
minimise the (extra) costs of higher fuel prices.

4.2.2

Reactions by users of passenger transport services

As passenger transport operators usually do not immediately transfer increased operating
costs in higher prices, there clearly is not likely to be a reaction from transport users. Of
course, in the longer run transport prices may increase in response to cost increases, but
as indicated the role of the fuel price in total costs is relatively small in passenger
transport.

Nevertheless, in the event that operators actually increase their prices immediately or
shortly after an increase in fuel prices, some reactions could occur. Economic literature
states that a user of public transport generally has the same options as travellers by private
cars:

•

‘Simply paying the higher ticket prices’, so no behavioural change takes place

•

Adjusting the pattern of trips

•

Adjusting the pattern of activities which also inclu des adjusting the pattern of trips

Similar to the reaction of car owners, the behaviour of users of passenger services may be
different in the short, medium and long term:

•

Short term: the traveller does not change his pattern of trips or his pattern of
locations. As fuel and ticket prices rise, the cost of mobility increase will put an
extra constraint on the household budget (income effect).

•

Medium term: a rise of ticket prices might lead to substitution effects. A user of
public transport may ‘switch’ to another mode to compensate for the extra costs
of public transport.

•

Long term: the pattern of activities may be adjusted, by choosing another location
of working, recreation or even living; by shortening the travel distance a car
owner can reduce the number of kilometres he travels resulting in lower fuel
costs.

The impacts of higher ticket prices on demand for passenger transport services have
recently been researched by MuConsult (2003). It shows that a ticket price increase of 5%

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

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for public transport is likely to result in a 1% decrease (demand elasticity of -0.2) of
public transport use. To some extent this will result in less trips made, but also in a higher
use of other transport modes. Taking into account that fuel prices represent only a small
share in the total operational costs of public transport, it may be expected that higher fuel
prices will have a very small impact on public transport through changes in passenger
transport users’ behaviour.

Also in the case of public transport increasing costs for commuting and business trips
may be compensated (partly) by the employer of a public transport user. Consequently,
these trips may not be very sensitive for fuel price increases. Similar to the car owners’
behaviour, the biggest impact may be expected on ‘social’ trips as a user fully bears the
costs for these trips. In general, business travellers, due to their high value-of time will
react insensitive to price increases. Commuter and leisure travellers, with a relative low
value-of-time are much more sensitive.

Also in the medium and long term the impacts of rising fuel prices may be small. Other
cost factors intervene in the long term, which may neutralise the negative effects of rising
energy costs. This holds in particular for urban public transport improvements in the
service supply and in the quality of equipment, which could neutralise the negative
effects of increased energy costs.

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4.3 Conclusions on the impacts and reactions in passenger transport

The various segments in passenger transport are affected in different ways by an increase
of transport costs. As public transport (rail, bus, tram) is considered as a public service,
fuel price increases are not directly translated into higher user tariffs.

For airlines the situation is different, as they widely use fuel surcharges on the ticket
price, by which the higher costs of fuel can (partly) be passed on to the traveller. This
may in particular have an impact on the high elasticity demand segments of the market
(e.g. holidaymakers using low cost airlines).

Generally , private car users are less hesitant to pay for the fuel price increases, even
though the share of fuel costs in variable car use costs is high. In this case there is a
difference in short-term and long-term reactions. In the short run car owners may cut
down on less necessary trips, i.e. those made from a recreational or social point of view.
Such trips usually have a higher price elasticity of demand than commuting or business
trips, partly because the costs of the latter can be (partly) passed on to the employer. Car
users may also change their driving behaviour in such a way that it is becomes more fuel
efficient.

In the long term, car owners can decide to change their travel patterns by changing for
instance their commuting distance (moving to their work or changing jobs). Consumers
will also buy less energy consuming cars when fuel prices remain at a high level. This can
for instance be seen from the increasing use of diesel fuel cars in the EU.

Transport operating companies will tend to buy more energy-efficient vehicles (busses,
airplanes, trains). More attention for cost awareness and fuel efficient driving behaviour
are also reactions that companies show in the middle and long term.

The figure below presents, in a similar way as in freight transport, how the various
transport segments are affected by oil price developments and demand reacts to tariff
increases.

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Figure 4.4

Relation between impact and price elasticity in passenger transport

The figure above presents only a qualitative and relative view. Within each segment the
elasticity can vary substantially. For instance business travellers will have different
reactions then social travellers, whereas captive travellers in rail transport (commuters)
will have other reactions to price increases then recreational travellers.

Substantial effects form oil price increases can be expected, though, in certain segments
of air transport, in particula r those which are based on low prices. In other segments of
the air passenger sector (e.g. business travellers) the impact will be much lower, partly
because of fuel surcharges being a smaller part of ticket prices.

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5 Reactions of other economic agents and

governments

Having explored the reactions of providers and users of transport services, this chapter
deals with reactions of other agents involved. These range from manufacturers of
transport equipment, to sector wide reactions of groups of transport users or transport
providers, to governments. In these reactions quite different patterns might be expected as
the interest of each of the types of agents is different. Manufacturers will clearly be
guided by a desire to continue the production of transport equipment in the future
circumstances and can be expected to have a long term interest in increasing fuel
efficiency.

Transport sector wide reactions are more likely to be guided by short term interests in
neutralising the increased costs of transport or living. Governments are likely to be
guided be both short term interests (appeasing pressure groups) and long term policy
perspectives such as among others sustainability of transport and economic production,
and economic efficiency and competitiveness.

5.1 Reactions of transport equipment manufacturers

5.1.1

Car Manufacturers

In the 1970’s the oil crises increased demand for fuel efficient cars. Car users became
more aware of the cost of fuel and fuel efficiency has become one of the criteria for the
choice of car. However, it is one of the criteria, while other developments and demands
also play a role. For instance as already indicated the engine power of cars has increased
over time.

Another development is the increase in average vehicle weight. As the figure below
shows, the light-duty vehicle weight in Europe has increased on average about 30% over
the last 30 years. Increases in the average vehicle weight reflect the combined impact of
two trends: (1) the growth in the average weight of vehicles within individual vehicle
classes (see next figure), and (2) increases in the proportion of total vehicle sales
represented by larger vehicle classes.

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Figure 5.1

Development of the average light-duty vehicle weight in Europe

Source: Forschungsgesellshaft Kraftfahrwesen mbH Aachen (FKA), Body Department, “Final Report:

Lightweight Potential of an Aluminium Intensive Vehicle,” December 2002

The increase of the within-class weight results from the adding of additional features to
the car, for example add-ons that increase safety, improve driving characteristics, reduce
noise, reduce emissions and increase comfort. This required adding new components to
the vehicle interior, body and chassis, which have become structural components of cars.
They also have been electrical or electronic – for example, the capacity of electrical
systems has to be increased to handle the additional electric power demands. Heavier cars
also require additional equipment to maintain driving performance. The weight of some
components has been reduced through design changes and materials substitution. But
these reductions have been more than offset by the growth in weight due to the increase
in vehicle functionality.

The increase in vehicle weight can also be seen in the next figure. It can be seen that
improvements in gasoline-powered engine fuel consumption were achieved in Western
Europe, while at the same time, rated power and vehicle weight increased.

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Figure 5.2

Passenger car fleet characteristics, 1995-2003

Source: Future powertrain technology… Many options, even more unknowns , Stefan Pischinger, FEV Group,

2005

The next figure depicts the development of the average sales-weighted fuel consumption
rates of passenger cars sold in Europe from 1980 to 1995. During this period fuel
consumption rates of passenger cars fell by 12%, from 8.3 l/100km to 7.3 l/100km. As a
result however of the increase in the proportion of larger vehicles in total sales combined
with the increase in average vehicle weight, all of the decrease occurred between 1980
and 1985. From 1985 till 1995, the (weighted) fuel economies of new passenger cars sold
in Europe have remained essentially constant.

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Figure 5.3

Weighted average fuel consumption of new passenger cars in Europe, 1980-1995

Source:

http://www.pnl.gov/aisu/pubs/eemw/papers/ipccreports/workinggroup3/099.htm#fig38

Since about 1998, there has been a continuous increase in the penetration of high-speed,
direct-injection diesel engines into the passenger-car market in Western Europe.
Encouraged by high absolute fuel prices and a reduced tax level on diesel fuel (compared
to gasoline), the popularity of these fuel-efficient vehicles have been exceptional. In
response to consumer preference, the car manufacturers have adapted the passenger-car
diesel engines to increase power, engine speed range, and advancing fuel efficiency and
exhaust emissions control. The figure below shows a comparison of gasoline-powered
vehicles and their direct-injected diesel-powered competitors as functions of vehicle
weight. It can be seen that as vehicle weight increases, the average fuel-consumption
improvement increases from 34% at 2200 lb (1000 kg) to 40% at 4400 lb (2000 kg).

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Figure 5.4

Fuel consumption versus vehicle weight

Source: Future powertrain technology… Many options, even more unknowns , Stefan Pischinger, FEV Group,

2005

Introduction of new technology

In the 1990s concerns over the impact of fossil-fuel consumption on climate change re-
emerged. In reaction Toyota decided to develop a hybrid car, a cross between a gasoline-
powered car and an electric car, to obtain a car with far better fuel economy and lower
emissions than existing vehicles. Improved technology - such as better batteries and
cheaper, more powerful control electronics to co-ordinate the two propulsion systems -
meant that a mass-produced hybrid became feasible. In 1997, the Prius was launched in
Japan. It was followed by Honda's Insight hybrid in 1999.

Market penetration of hybrid cars in Europe has been slow. In 2004 only around 8500
new hybrid electric cars were registered in the EU-15,

a mere 0.06 per cent of total sales

of new cars

The Toyota Prius dominates the hybrid market. With rising fuel prices

however the market for hybrid cars could expand.

In the US the sales of hybrid vehicles

are expected to have approached 200.000 in the year 2005. Compared to 2004 (85.000
hybrids) and 2003 (25.000 hybrids) this is a substantial increase

Another line of reaction is to increase fuel efficiency of petrol and diesel cars. In this
respect German manufacturers indicate that diesel engines can achieve comparable, or
better, fuel consumption than hybrids. This may be a more important development, as in
some European countries, diesels now account for more than 50% of new car sales, as
shown above.

Based on an assumption of the 2004 sales being 14 million. Source: ‘Reducing CO

emissions from new cars’, Per

Kågeson,

T&E, Stockholm, 2005.

Source:

http://analist.be/component/option,com_simpleboard/Itemid,61/func,view/catid,28/id,2732/

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In Europe, to control greenhouse gas emissions from the transportation sector, the
European Commission has signed voluntary agreements with the automotive industry to
reduce the emissions of carbon dioxide (CO

). Three agreements were signed in 1998-99,

with the following associations:

•

ACEA—European Automobile Manufacturers: BMW, DaimlerChrysler, Fiat, Ford,
GM, Porsche, PSA Peugeot Citroën, Renault, VW Group.

•

JAMA—Japanese Automobile Manufacturers Association: Daihatsu, Honda, Isuzu,
Mazda, Mitsubishi, Nissan, Subaru, Suzuki, Toyota.

•

KAMA—Korean Automobile Manufacturers Association: Daewoo, Hyundai, Kia,
Ssangyong.

Cars sold by the above companies represent about 90% of the total EU vehicle sales.
The agreements define fleet-average CO

emission targets from new cars sold in the

European Union, to be reached collectively by the members of each association. The
emission targets are to be met through technological advancements leading to increased
fuel economy. The Commission estimated that the fleet of new passenger cars put on the
market in 2008/2009 will consume on average about 5.8 l petrol/100 km or 5.25 l
diesel/100 km

. The CO

agreements have been an important factor driving the increased

dieselisation of the passenger car market in the EU.

In order to meet the Community target to reduce CO2 emissions from new passenger cars
additional measures were recently taken. On July 2005 a proposal from the Commission
for a Council Directive on passenger car related taxes was adopted. This directive aims at
introducing a CO

element in the calculation of car taxes for those Member States that

have such taxes

Different fuel technology

Another result from the oil crises in the 1970s was the introduction of bio fuels

. Brazil

was the original bio fuels pioneer, reacting to the 1970s oil crisis with a “pro-ethanol”
programme so successful that by the mid-1980s, ethanol-only vehicles accounted for 90%
of new car sales. But a poor harvest in 1990 led to a national ethanol shortage. Drivers
never trusted the fuel again. Flex-fuel cars remove that risk, and they now account for
some 40% of new car sales in Brazil. The introduction of Volkswagen’s Totalflex Golf in
March 2003 has brought ethanol use back to its heyday.

Ford followed Volkswagen to Rio with its Ford Focus Flexi-Fuel, also big in Sweden.
Fiat, General Motors, Peugeot and Renault have also launched flexi-fuel cars. The cars
have sensors that monitor the fuel and adjust the engine to cope with whatever mix of
ethanol and petrol is in the tanks. The complete switchover to a new power system could
be the most dramatic change in powered transport the world has seen: 590 million cars
would need to be replaced.

Source:

http://europa.eu.int/comm/environment/co2/co2_agreements.htmm

For more information see

http://europa.eu.int/comm/environment/co2/co2_expgrp.htm

http://www.thebusinessonline.com/Stories.aspx?Where%20do%20%20you%20get%20your%20energy%20from?&StoryID=9B

F1933F -64B1-4608-8C78 -E5F03F8703C6&SectionID=F60D3E05- 7185-44C B-BB45-97AC94420FD5

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5.1.2

Aircraft Manufacturers

As already mentioned in paragraph 2.2.8, fuel costs amounted from 15-30% of total
airline expenses. For a fleet with a large new-generation aircraft type, fuel costs can
represent as little as 10% of their total operation cost, compared with as much as 30% for
the least efficient fleet. Because fuel costs represent a substantial part in the operating
costs, airlines constantly strive to optimise the fuel efficiency of their aircrafts. One way
of doing this is by demanding higher fuel efficiency of aircrafts, in order to cut back
operating expenses.

How did the airline manufacturers react? Taking Airbus as an example, it can be seen that
a fuel efficient new-generation aircraft, such as the Airbus A319, consumes typically 20%
less fuel per seat than a mid-generation aircraft mostly delivered in the 1980s, and 40%
less than an old generation aircraft. A new wide-body aircraft, such as the Airbus A330,
consumes typically 55% less fuel than an older-generation aircraft such as the DC10. On
a present value basis over 15 years, the difference in fuel consumption between a new and
mid-generation single -aisle aircraft translates into a $5 million saving or $9.5 million
saving when compared to an old-generation aircraft.

As a result today’s world fleet is about 70% more efficient per passenger kilometre than
in the 1960s.

Figure 5.5

Present Value of Fuel Bill per seat for different generation aircrafts

Source: Airbus: „Global Market Forecast 2004-2023“, Airbus S.A.S, December 2004

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Figure 5.6

Difference in f uel consumption per seat of Mid-generation and Old-generation aircrafts compared to New-

generation aircrafts (in %)

Source: Airbus: „Global Market Forecast 2004-2023“, Airbus S.A.S, December 2004

Manufacturers maintain that the potential for airlines to reduce their fuel cost is
significant. Of the 13,612 aircraft in service in 2004, 2,712 are old-generation and 5,529
mid-generation types, like 737-300, MD80 and 757-200. Historically, rapid oil price
increases have triggered the acceleration of aircraft retirement. The current oil price
increase is also stimulating aircraft retirements and keep older, less efficient parked
aircraft on the ground. This demand is being met by more fuel efficient aircrafts from the
manufacturers.

Figure 5.7

High oil prices trigger aircraft retirements

Source: Airbus: „Global Market Forecast 2004-2023“, Airbus S.A.S, December 2004

Rival Boeing is also of the same opinion and has successfully promoted the 787 because
of its fuel efficiency. Also Boeing's 777 series outperformed Airbus's long-range models

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last year, partly because the 777, with two engines, is more fuel- efficient than the four-
engine Airbus aircraft. Boeing in 2005 recorded 154 orders for the 777 model. Airbus's
total figure for twin-engine A330s and four-engine A340s combined through the end of
November was 72.

Finally it has to be remarked that in the past the military sector in the USA was often the
breeding ground for new aircraft technology, but because of the budget reductions these
opportunities for transfer of technology, financed outside the market sector, have
decreased. As a result the engineering/aircraft development cost of new airplanes have
increased considerably resulting in higher prices for aircrafts. For example, the Boeing
777 has an estimated development cost of $17.5 million per seat (1993 prices), while the
Boeing 747 is estimated to be $8.0 million per air-craft seat (1993 prices). Thus in a
period of 20-25 years these development costs have doubled. This is mainly due to higher
technological complexity and the increased safety standards that aircraft have to comply
with. For manufacturers who have aircraft and engine types that have not reached a
mature stage in the product life cycle, new products can therefore threaten profitability.

As aircraft prices have risen, while airline revenues have come under pressure due to
increased competition as a result of deregulation and liberalisation, the aircraft market has
developed into a market in which it is becoming more difficult to justify the cost of new
aircraft technology if this new technology does not lead to new efficiencies in aircraft
economics. Thus the cost of new technology will become a critical factor for airlines to
implement it.

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5.2 Responses of political decision makers and other economic agents

Responses of political decision makers

During the 1970s, European (and world) dependence on crude oil was painfully
illustrated by two international oil crises. The crises prompted a call to policy makers
throughout Europe to take policy measures to reduce the oil dependence, to secure the
supply of energy and reduce the impact from fluctuations in oil prices on the national and
European economies.

In a reaction to the crises most European governments resided to policy actions to
improve the energy intensity and lower the dependence on oil as major fuel for energy
throughout the economy. In the transport sector, being very energy intensive and highly
dependent on oil as the basis of fuel, the options pursued by most governments focused
on:

•

increasing the energy efficiency of transport vehicles (stimulating research to develop
more efficient engines, different types of fuel e.g. LPG, electrification of public
transport);

•

increasing the fuel-efficiency of the transport system (shifting to more energy-
efficient modes; optimise transport routes, occupancy rates, maintenance and driving
behaviour); and

•

reducing transport activity without hurting welfare levels (e.g. by changing land use,
spatial planning, adjust pricing through tax to influence demand for transport).

The policy measures and actions in the transport sector were all designed to result into
effects on the medium and long term. During the first two oil crises, there are only few
examples of short term policy actions in the transport sector. Only during the 1973 oil
crisis, a number of countries (ao. Netherlands, UK) turned to fuel rationing measures,
through “car-less” days, fuel coupons, etc.

Previous chapters have demonstrated that governments in recent years did not turn to
temporary tax relieves or compensation in periods of higher crude oil prices. Only Italy
and Portugal tried to smooth the effects of increasing oil prices during the period 1999-
2000 by reducing the excise duties sometimes to the minimum set by European
legislation (Portugal).

Fuel tax should be seen as a measure to increase the price of one type of transport or fuel
(car, diesel) over another (public transport, train, inland waterway) and steer transport
behaviour. Furthermore, in countries with high fuel taxes, the need for compensations or
tax breaks during periods of high oil prices up to 1999 was not obvious.

In general, one can state that if, for example, the share of taxes in the final diesel price is
high (for example UK, Norway and Germany), any given rise in the price of crude oil
will have a smaller proportionate impact on diesel costs than in a country where diesel
taxes are relatively low (i.e. Portugal, Bulgaria and Poland).

Although oil dependency and the need to achieve greater fuel efficiency have remained
priorities in transport policy, it received far less public attention during the last years of
the eighties and nineties and the sense of economic urgency within the transport sector
and transport consumers seemed to fade a bit.

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Medium and long term reactions to 2000 and 2005 price hikes

In relation to the transport sector the oil prices hikes in 2000 and 2005 have triggered
both the same and new policy reactions from governments throughout Europe, compared
to the price hikes in the seventies.

The medium and long term strategies for the transport sector that have been formulated as
a reaction on the most recent price hikes are in essence not really different from the
actions and strategies that where formulated as a reaction on the price hikes of 1972 and
1979. They have been redefined and endorsed gaining from the momentum to get more
support to bring sustainable transport a step further, often combining environmental
energy security targets.

As an example, Sweden launched a new policy programme to substantially reduce its
dependence on oil. Swedish policy instruments such as investment grants, norms for
energy use, loans with interest subsidies and information drives have formed the basis of
a conscious policy to gradually reduce oil use. Within the new national programme
against dependence on oil, breaking the dependence on oil in the transport sector is an
important feature and the Government therefore has an ambitious policy to increase the
percentage of renewable fuels. For the individual, it will pay to choose an
environmentally friendly car. Carbon dioxide neutral fuels are to be exempt from both
carbon dioxide tax and energy tax for a five-year period to give them a comparative
advantage towards petrol and diesel. Cars that are classified as a taxable benefit and run
on environmentally friendly fuel will continue to enjoy tax relief. Also, will cars that are
environmentally friendly be exempted from the Stockholm Trial with environmental
charges and will they have access to free parking in some municipalities. Finally, the
Swedish policy will be promoting an agreement to permit a higher blend of ethanol in
petrol.

Also on a European level policy actions have been initiated in a reaction to the current
price hike in oil prices. On 6 September 2005, Energy Commissioner Andris Piebalgs
presented a five-point plan to deal with the surge in oil prices. The five-point plan

counter rising oil prices actually consists of several actions grouped under five headings:

•

Reducing Europe’s demand for energy

•

Switching to alternative energy sources

•

Increasing transparency and predictability of oil markets

•

Increasing the supply of oil and gas

•

Better co-ordination of strategic oil reserves

The transport sector will particularly be affected by measures and actions that will be
presented under the first two headings. Measures under the first heading intend to
promote more international action on energy efficiency, and include the presentation of a
new action plan on energy savings early 2006, following the publication of the Energy
Efficiency Green Paper in June 2005. Under the second heading the Commission will,
amongst others, push for an increase of research budgets on renewable energies, clean

European Commission, MEMO/05/302

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coal and carbon sequestration, and increase financial support for renewables in the
member states will be under review.

Short term reactions to price hikes of 2000 and 2005

Apart from the medium and long term policy actions that have been formulated by the
Commission and national authorities, the 1999-2000 and 2005 oil price hikes forced
national authorities to take tax and compensation measures for the transport sector. This
did not happen during previous oil price hikes.

In the fall of 2000, a wave of protests against high fuel prices moved across Europe. The
protests started in late-August with a blockade of English Channel ports by French
fishermen, and then spread across France as disgruntled truck drivers and farmers blocked
oil refineries and distribution depots to combat high fuel costs. After weeks of protests,
the French government promised French transport companies and companies in other
sectors heavily depending on gas and diesel sectors (fishery, agriculture, steel) that they
would receive a rebate on their company taxes. The French concessions ignited similar
fuel protests, amongst others in Belgium, Germany, Hungary, Ireland, Italy, Poland, the
Netherlands, Spain and the UK, forcing the governments to take tax or compensation
actions.

The United Kingdom had a policy of increasing fuel taxes by 5% per year as an energy
conservation and transport demand management strategy. In November 2000 the
government discontinued that policy in response to popular resistance due to wholesale
fuel price increases, but has not reduced taxes. Since that time Vehicle Excise Duty has
been halved on many categories of heavy-goods vehicles.
Similarly, the Dutch government decided that diesel taxes would remain unchanged in
2000, and again in 2006 that fuel prices will not be adjusted for inflation (in previous
years this was automatically done at January the first). In Italy, mass protests in 2000
were averted only after the government agreed a direct reduction in fuel prices for lorry
drivers.

Also in Hungary protest were ended almost immediately, after the government started
negotiations with representatives of rail and road haulers and shippers. The government
backed down on its plan to raise excise duties. As long as the world market average price
per barrel of Brent crude oil remained above USD 25, the administration would refrain
from submitting proposals to the Hungarian Parliament concerning an increase in the
excise duties on fuel to bring it in line with inflation. Furthermore, the transport firms
would be bolstered by tax breaks: small and micro enterprises including one-man firms
would be able to decrease their tax base by a maximum of HUF ten million (€ 38,000), a
concession which extended to vehicle purchase as well. They would also be entitled to tax
concessions in line with the amount of interest paid on investment loans, comprising 20
per cent of the annual interest paid (though a more generous 40 per cent applied to
economically backward regions). The maximum total concession would be HUF five
million (€19,000)

CER,Vol 2, No 32 25 September 2000

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Reactions of other economic agents

Comparing the reactions of the various stakeholders outside the transport sector on the oil
price hikes of 1973-74, 1979-81 1999-2000 and 2003-2005, there are some clear
similarities and differences.

All periods of oil and fuel price hikes have fuelled the attention and awareness of the
need to reduce oil dependence. Apart from public authorities, environmental pressure
groups and lobbyists have used these situations as an opportunity to plea for new
measures (legislative, tax, subsidies, investment, research) to stimulate fuel efficiency and
introduce alternative fuels and technologies in the fight against global climate change.

The transport sector has been a major focus area for environmentalist, calling for action in
seven areas to tackle transport oil dependence:

•

Legal requirements on the car industry to ensure that new vehicles are significantly
more fuel-efficient, so helping consumers cut their costs;

•

Financial and legal incentives to increase the production and use of sustainable -
produced bio fuels (fuels made from renewable sources);

•

Greater support for rail freight and inland waterway freight transport;

•

Greater support for public transport, walking and cycling in transport planning;

•

Financial incentives to encourage motorists to use public transport, including
increases in fuel tax and the introduction of congestion charging and road pricing;

•

High road taxes for the least efficient and most polluting cars to encourage motorists
to buy cleaner alternatives in the pre-budget report; and,

•

The introduction of demand management measures, including fair taxation, for
aviation.

Particularly, measures in the areas of fuel and road taxing, congestion charging and road
pricing have met strong public resistance during the last two oil price hikes. In various
countries public pressure groups (among others in France, Italy, UK, Spain) lobbied the
government, warning that spiking transport and energy prices posed a serious threat to
both businesses and consumers.

The anti-fuel tax protests initiated by stakeholder organisations and pressure groups in the
transport, agriculture and fishery sectors that particularly in 2000 swept across Europe
had a very strong impact. Economic activities and public life became disrupted in various
parts of Europe as a result of truck driver strikes and the blockades of roads, ports, oil
refineries and distribution depots.

The estimated costs of the protests were enormous. Officials in France estimated the
financial cost of ending the dispute at 432 million Euro

. UK estimates of the financial

impact of the week-long fuel drought topped 1,6 billion Euro

. The London Chamber of

Commerce estimated that 10 percent of the economy's daily output was being disrupted
by the protests

, costing British business 225 million Euro a day.

Chris Marsden, Fuel Protests Escalate Throughout Europe, 12 September 2000.

Cost of Dispute Could Top £1bn, Say Firms . Guardian Unlimited on Line, 15 September 2000.

Post, Banks, Food Supply Now at Risk. Guardian Unlimited on Line,14 September 2000.

Britain Grinds to a Halt as Blair's Pleas Are Ignored. Guardian Unlimited on Line, 14 September 2000.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

118

The scale of the public upset during the oil price hikes of 1999-2000 and 2005 distinct
them from the earlier responses of economic agents and the general public. Whereas
during the 1979-80 price hike nobody was held responsible or blamed for the ris ing fuel
prices, and in 1972-73 the OPEC countries were generally blamed, in 1999-2000 and
2005 the national governments and oil companies were blamed.

Impacts on competition

In as far as transport costs increase as a result of higher oil prices, and in particular when
this happens in a short period, governments are likely to come under pressure to respond.
This in particular happened in 2000 and 2005, as described above.

Government responses can take various forms:

•

Fiscal compensation, for instance by reducing taxes and duties on transport

•

Compensation of companies experiencing high transport by for instance lowering
corporate taxes

•

Giving or increasing (temporary) subsidies to groups hit hard by transport cost or
tariff increases. This can for instance be the case for commuters hit by price increases
in public transport, or by compensating transport companies for higher fuel prices.

•

Rationing fuel thereby reducing the fuel availability for users, or prohibiting the use
of vehicles on some specific days

Some of these types of actions may disturb fair competition between companies. For
instance, if Member States government act differently in this respect, there may be a
feeling of distortion of market relations. Such a distortion should be seen, though, in the
light of other price distortions caused by the government, such as levying taxes and duties
on fuel below the level of external costs. As fuel taxes differ considerably between
Member States a (temporary) reduction in such taxes to counterbalance high fuel prices
might still result in tax which is higher than levied in other Member States.

From the evidence found, it appears that there is an increasing awareness that coordinated
action is needed between Member States governments. In 2005, for instance, the member
states explicitly decided not to compensate transport companies (or other businesses) for
the increase in fuel prices. In the past such agreements could not be reached and the
situation occurred that some Member States in some way compensated transport
companies, while others did not. This in particular happened in 2000.

It is difficult to establish, though, whether this has lead to unfair competition between
transport companies in the international market. For instance, if there is a temporary
reduction in fuel taxes resulting in lower prices, of which all transport companies can
benefit in the particular country, irrespective of their nationality, there is not likely to be
any unfair competition. Because, all transport operator picking up fue l in the country can
benefit.

In other cases unfair competition may have been stimulated, though. This could have
been the case when governments compensated only own nationality transport carriers by
fiscal measures (such as reducing corporate taxes), which use this benefit to compete
better in international markets. Even then, though, temporary reductions in corporate
taxes may be less than the already existing differences in corporate taxation.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

119

5.3 Conclusions on the reaction of other economic agents and

governments

This chapter has explored the reactions of car manufacturers, aircraft manufacturers,
governments and pressure groups on oil price shocks. The following can be concluded:

Car manufacturers

Fuel efficiency of passenger cars has constantly been improved by the car manufacturers.
These fuel efficiency gains have however (partly) been off-set by the increase in the
weight of cars, the increase in the average engine power of cars and the increasing
proportion of larger vehicles sales in total sales.

With regard to new (fuel) technology, the main developments are the introduction of
hybrid cars by Japanese car manufacturers and bio-fuel cars in Brazil. European car
manufacturers also followed the hybrid-fuel path, but at the same time endeavoured to
improve fuel efficiency of for instance diesel cars. This improved fuel efficiency of diesel
cars combined with prices of diesel being lower than prices of petrol has resulted in an
increasing market of diesel cars in all EU countries.

Aircraft manufacturers

Aircraft manufacturers have responded to demands for more fuel efficient aircrafts, even
though development costs of such new types have increased considerably. This has
resulted in new generation aircrafts to be about 40% more fuel efficient than old aircrafts
and has consequently helped to reduce the fuel costs of airlines. By replacing older
aircrafts more quickly, the fuel efficiency of the fleet has been further increased.

Governments and pressure groups

The various oil price hikes have prompted governments to take both short and long term
actions. The longer term actions generally focus on increasing fuel efficiency and
stimulating the development of new technologies, stimulating modal shift, etc. Short term
reactions include fuel rationing by some countries in the early seventies.

In particular in 2000 various pressure groups demanded compensation for high fuel prices
and many governments bowed to this pressure by granting fiscal compensation (various
countries), or holding back on planned excise duties increases. Only in a few cases taxes
and duties were reduced. In 2005 EU governments agreed to avoid such actions at
country level as response to demands from pressure groups.

Even though various governments in 2000 decided to compensate the transport and other
sectors for high fuel prices, it is not evident that this has caused unfair competition. In this
respect various other taxes, like fuel taxes and duties and the level of corporate taxes,
differ considerably between EU countries, causing cost differences between operators.
Compensating measures may increase or decrease such differences (temporarily), but as
long as they are not discriminating or within accepted ranges of tax differences, it is
difficult to label them as unfair.

Analysis of the impact of oil prices on the socio-economic situation in the transport sector

120

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