28th January 2015
Motorists stand to save an average of £146 per year as a result of lower petrol prices, new calculations reveal.
The analysis, from Hargreaves Lansdown, suggests that consumers will save a total of £5.3bn this year due to fuel price cuts.
The financial adviser believes the drop will have a positive impact on the economy, as consumers will now have more in their pocket to spend on other goods and services.
The saving from petrol price cuts will be much greater than that of recent energy price reductions, which are estimated to be worth around £0.5 billion.
Laith Khalaf, senior analyst, Hargreaves Lansdown: “Falling fuel prices will deliver substantial savings to the UK public, in aggregate more than a 1p cut in income tax would. This is an adrenaline shot delivered straight to the heart of the UK economy – the Great British consumer. The average household can look forward to saving almost £200 a year on car travel, if prices remain where they are.
“Consumers can do one of three things with the extra money in their pockets; spend it, save it, or use it to pay down debt. In all likelihood we will see a combination of all three, and many UK businesses stand to benefit from the additional revenue generated by higher consumer spending power.”
The price of oil has fallen from $115 a barrel last summer to under $50 a barrel today. This has led to a fall in fuel prices on UK forecourts, with petrol falling from 131 pence per litre in July 2014 to 107 pence today, its lowest level since 2009. Meanwhile diesel has fallen from 136 pence per litre in July 2014 to 114 pence today, Hargreaves Lansdown said.
The £5.3 billion saving is equivalent to 1.3p drop in the basic rate of income tax rate (currently charged at 20p in the pound). If petrol prices were to fall to £1 and remain at that level, this aggregate saving would increase to £7.2 billion saved each year compared to 2014. That would be equivalent to the taxpayer benefit from a 1.7p drop in basic rate income tax, according to Hargreaves Lansdown.
The average male motorist stands to save £175 a year compared to £114 for female motorists. This is because the average male motorist drives 6,866 miles a year, compared to 4,476 miles for female motorists.
The highest income households stand to save four times more than lowest income households, because they drive significantly more car miles. The top fifth of households by income level stand to save £329 a year, whereas the bottom fifth stand to save £77 a year. The average household stands to save an estimated £180 a year
Should the price of petrol fall to £1 per litre and stay there, this figure would rise to a £452 saving for the top fifth of households and £106 for the bottom fifth.
The analysis also highlights regional differences in cost savings. The typical Londoner only drives 1,430 miles a year and so London residents stand to save £36 a year on average. Meanwhile the average resident of the East Midlands drives 4,155 miles a year and stands to save £106 a year. Residents of the East of England and Wales also travel a lot by car, making an average saving of £103 each.
The £5.3 billion saving from lower fuel prices is a substantial economic stimulus for the UK consumer, according to Hargreaves Lansdown, but it is not the only economic effect we can expect from a lower oil prices. We can expect a further positive effect from lower energy bills, but a negative effect in the form of the impact on the oil and gas industry.
We shouldn’t expect a huge consumer spending spree right away, it will take some time for household budgets to digest and adjust to the savings they are making on fuel prices. When they do however, this should feed through to the top line of many businesses selling to the UK consumer.
Stocks which could benefit:
Many companies potentially stand to benefit from extra consumer spending as a result of lower fuel and energy prices, three are highlighted below.
Retailers up and down the country stand to reap the rewards of higher disposable incomes and cheaper transport costs. Next, with its compelling online proposition, could be well-placed to benefit.
2. Greene King
If the UK consumer is going to have more money to spend, some of it will be spent in the pub. Stocks like Greene King, the pub operator and brewer, could therefore be worth a look.
3. Merlin Entertainments
There aren’t many more discretionary purchases than a trip to a tourist attraction, so Merlin Entertainments should benefit from consumers with a bit more spare cash. It is second only to Disney as an operator of visitor attractions. Merlin’s best known attractions include Madame Tussauds and Legoland.