Boris Johnson once said that his policy on cake was simple: pro having it, and pro eating it. When it comes to a “no-deal” Brexit, the UK’s oil-refining sector is on the same page as its prime minister.
The industry has warned that crashing out of the EU threatens the closure of two of the country’s six refineries, leaving the UK scrambling for imported fuel. At the same time, the industry has pushed to halve the UK’s emergency petroleum reserves — a move apparently at odds with warnings over becoming more import-dependent.
So what is really going on?
First of all, refineries are not at any immediate risk. The warnings from refiners such as Essar and Phillips 66 centre on tariffs, which they say will create a competitive disadvantage over the long term. Under a no-deal Brexit the UK will cut tariffs on imported gasoline to zero. At the same time the UK’s refiners would face a 4.7 per cent levy on gasoline exported to the EU, if the country defaults to World Trade Organization rules.
The refiners’ argument, therefore, is that the UK needs reciprocal tariffs on gasoline imports to protect its domestic industry.
This is dubious. No industry wants to play on an uneven field; refining is a precarious business at the best of times. But after multiple plant closures over the past decade the UK’s production is better balanced with demand. Consultancy Wood Mackenzie says that margins may narrow slightly, but the industry “would not be crippled” by a hard Brexit.
The UK does not need to import much of its gasoline. Small volumes help balance the system, but overall there is a surplus produced by refineries. Gasoline traders say fears of a flood of cheap imports are overstated, as shipping costs mean they would still struggle to compete with domestic output. Exports would not necessarily be knocked either. At the moment the UK’s gasoline shipments go mostly to the US or west Africa, while a little goes to Ireland. Exports to other EU countries make up less than 10 per cent of total output.
Some figures within the energy industry warn, instead, that UK refiners really want import tariffs as they could then try to raise prices across the board.
At the same time, refining-industry lobbyists have convinced the UK government to cut its emergency oil stocks in half, by switching to International Energy Agency guidelines rather than legislating to maintain higher levels such as those mandated by the EU.
This will save the industry money, as suppliers are required to own and manage their own shares of reserves, locking up working capital. But some fear this exposes the UK to potential shortages, at a time of heightened tensions with Iran.
The industry might not want a hard Brexit, then, but it appears happy to play off both sides: Tariffs to help ward off competition and potentially boost prices, and lower reserves to save it money.
A good crisis, after all — like a good cake — should never go to waste.