Don’t panic! Fuel shortages not a threat to the economy, yet

The well-publicised fuel shortages, which have seen 90% of petrol stations running out of fuel and hours-long queues for those that haven’t, probably won’t make much of a difference to the economy if they end this week as is widely expected. 

But if the pumps stay dry for much longer, then the impact of people unable to go about their work and daily lives may join labour shortages, soaring energy prices and a lack of shipping containers as another drag on the economy. 

When is a shortage not a shortage? 

The government and the major fuel companies insist there is plenty of fuel to go around. The problem is a lack of lorry drivers to get fuel from refineries to the forecourt. Until panic buying took hold, even this was a small issue affecting a limited number of sites. 

The main issue is that demand for petrol has risen sharply. The Petrol Retailers Association said demand for fuel was 500% higher than a week ago at one service station. And HSBC says the value of transactions at petrol stations across the weekend had increased by two thirds. 

This has echoes of the panic-buying of food and other home essentials that happened at the start of the pandemic. Food sales volumes surged by 9.0% month-on-month in March 2020, causing headlines about empty shelves, but food sales fell back sharply over the next few months as the situation normalised. 

What about the economic impact?

The biggest risk from the fuel shortage is that people who actually need petrol are unable to get it and are unable to travel to work. There are plenty of anecdotal media reports of workers either being unable to get to work at all or spending hours queuing for petrol instead of working.

Before the pandemic, about 50% of workers drove to work. That figure may be a bit lower now due to homeworking, but a large part of the workforce will still need fuel to get to work. What’s more, a shortage of fuel for trucks and delivery vans risks exacerbating the shortage of goods which has been hampering the economic recovery. This will inevitably be a drag on GDP growth in September compared to if there were no shortages.

There is also some evidence that some petrol stations are putting up prices in response to the surge in demand. Given that motor fuel makes up around 2.7% of the CPI basket, a 10p per litre increase in the price of fuel would add about 0.02 percentage points to inflation in September. This doesn’t sound like a lot, but when inflation is already above 3% and rising it will add to consumers’ misery.

Admittedly, the surge in fuel sales will give retail sales in September a bit of a boost. Fuel sales make up about 10% of total retail sales. But assuming that people aren’t driving more than they usually do, or are even driving less than normal to conserve fuel, then this will be offset by lower fuel sales in October. The net effect on retail sales averaged over September and October will probably be minimal.

The good news is that there are already signs of shortages easing. After all, you can only panic buy one tank of petrol. And HSBC said that spend at petrol stations was starting to return to more normal levels. The government has also announced that it will temporarily allow 5,000 foreign lorry drivers into the UK to help with shortages.

Pictures of queues at the pumps could also give a boost to the nascent electric vehicle industry. The government has already said the sale of new petrol and diesel cars will be banned from 2030, and the recent chaos could prompt hesitant consumers to make the switch sooner.

If fuel supplies return to normal later this week, as expected, then the impact on GDP in September and October will be minimal as many people have chosen to work from home for a few days instead of commuting.

If shortages drag on, however, then the economic impact will become more severe in those sectors where working from home is not as easy, such as construction, manufacturing and transport. Indeed, fuel shortages could be another reason to add to the list of why the economic recovery seems to have stagnated in the second half of the year.