UK diesel and petrol prices: fuel costs on the up

pumps
5 Apr, 2016 10:00am Martin Saarinen

We examine the issues around UK fuel prices: why petrol and diesel is so expensive, and where to get cheaper fuel

The price of fuel has risen for the first time in eight months with petrol up three pence per litre, according to the latest data from the RAC.

Oil prices have increased by around eight per cent per barrel causing a hike in petrol and diesel prices and even supermarket forecourts - normally the cheapest around - have risen.

Chancellor George Osborne announced he would freeze fuel duty again during his Budget announcement despite concerns he'd slap extra tax on filling up but motorists are still paying more to fill up.

The latest rise was predicted after experts said global oil prices would rebound after their biggest fall in 12 years. In January, a barrel of oil cost just £26. That's closer to £28 now.

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RAC fuel spokesman Simon Williams said: "An earlier meeting between OPEC and non-OPEC countries responsible for nearly 75 per cent of the world’s oil production led to output being restricted to January levels. While this helped to revive oil prices, producers clearly still feel a further limit on production is needed. This is bad news for motorists as it will inevitably lead to more price rises on the forecourt.

"It looks as though we are heading towards a new norm of the oil price fluctuating between lower and upper limits of $35 and $55 a barrel. This means that motorists should hopefully not see the eye-watering prices they were paying at the pumps in April 2012 when the average price of petrol was 142ppl and diesel was close to 150ppl."

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Since November 2015, motorists across the UK have been able to enjoy fuel prices below £1 per litre, after supermarket chains Asda, Tesco, Morrisons and Sainsbury's all slashed their prices. Diesel fell to 99.7ppl (pence per litre) in January – the cheapest since 2009 – while petrol hovered around £1. 

To understand more about what makes up the retail price of fuel, why the price of petrol and diesel varies, why motorway service stations charge more than other forecourts and why global oil prices have taken a tumble in recent times, read on for our complete fuel guide that answers your key questions regarding fuel and fuel prices.

What makes up the price of fuel?

The price of fuel can be divided into three sections; the taxes imposed by the Government, the costs of drilling, refining and transporting, and the profit margins for the fuel companies. 

For petrol, diesel and bioethanols, the Government gets around 65 per cent of the overall cost through fuel duty and value added tax (VAT). The fuel duty represents the fixed price of fuel – it stays the same regardless how much overall oil prices fluctuate – and is currently frozen at least until the next UK budget on 16 March 2016. Currently, the Treasury adds 57.95 pence to each litre of fuel through fuel duty, and another 20 per cent through VAT. How much you pay in VAT depends on how much fuel you purchase.

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Morrisons petrol station

The second biggest chunk comes from the wholesale costs of the fuel itself. The wholesale cost is a combination of currency exchange rates, global oil prices, and even domestic supply and demand.

Finally, the smallest share of what motorists have to pay for fuel comes from the filling stations themselves. A typical fuel station profits around 2p-5p per litre, but tough competition can drive this down further. Supermarkets increasingly use fuel prices as a loss leader to tempt customers in.

Why is petrol and diesel so expensive?

It seems bizarre that the digits on forecourt price boards have barely changed when global oil indexes have plummeted from $100 per barrel of oil in 2014 to below $40 in 2016.

Although many motorists think petrol stations are patting themselves on the backs and reaping in massive profits, the reality is that despite global oil prices tumbling, an average forecourt only makes two to five pence of profit per litre of fuel sold. The real reason why prices remain frozen is because of the costs the Government has attached to the price of fuel.

Motorway

The Government’s share of taxes represents around two-thirds of the entire cost of fuel – and because the fuel duty is a fixed cost, it remains unchanged by global oil prices.

The drop in oil prices thus affects only around a third of the overall price of petrol and diesel, which explains why huge slumps in global oil indexes translate to only small savings at the pumps.

Why are global oil prices falling?

Global oil indexes are the current seismometers of a power struggle between the cartel-like Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC countries that have increased their own domestic production through alternative means of drilling for oil. 

Hydraulic fracturing or ‘fracking’ – the process of pumping water and chemicals underground to break apart the rock and release available oil and gas – has proven hugely successful in the North America. States like North Dakota have filled up with oil companies looking to cash in, causing a headache for the likes of Saudi Arabia and the other Middle Eastern countries in OPEC. Add in more oil coming from countries like Russia, Nigeria, and Venezuela, and it’s easy see how the increasingly crowded market could force prices down.

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Keen not to lose top dog status in the global oil supply chain, OPEC has responded by maintaining its production levels, thus supplying the market with more oil than is demanded. This is what is partially driving down the price of oil – and it is being done to make the means of oil extraction prohibitively expensive and to push smaller oil producers out of the market.

The plan seems to be working, however, as the latest statments from OPEC suggest that smaller oil producers are starting to crumble under the pressure of low prices. The latest report from the RAC Fuel Watch shows global oil prices are on the rise from a 12-year low. 

Why does my local supermarket offer cheaper fuel than an independent forecourt?

Supermarket forecourts usually offer the cheapest fuel prices – it’s not uncommon to find fuel below £1 per litre – and this is because of the market power supermarkets hold. Companies like Asda, Tesco, Sainsbury’s and Morrisons are all in competition with one another, so they keep fuel prices as low as possible hoping that when motorists come to fill their tank, they might do their weekly grocery shopping, too.

There are persistent rumours that supermarket fuel contains fewer additives and is of lesser quality than fuel from traditional forecourts, but there’s little hard evidence of this. All fuel sold in the UK has to abide by the standards set in the Motor Fuel Regulation. 

Why is diesel more expensive than petrol?

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Although diesel and petrol are taxed the same by the Treasury, historically diesel has been more expensive than petrol, as domestic refineries have struggled to meet demand. This has forced the UK to import diesel from other countries at a greater rate than petrol.

However, the influx of cheap diesel from countries like Saudi Arabia has turned the tide, swinging diesel wholesale prices closer to that of petrol, and bringing the pump price down with it. 

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Why is fuel so expensive on motorways?

Recent figures from the RAC suggest motorists topping up at a motorway fuel station pay up to 15 pence per litre more than elsewhere. Motorway fuel stations argue the reason their prices are higher is that many of them are open 24 hours a day and offer more services than a regular forecourt. Motorway fuel stations also pay high rent prices for the buildings they operate.

In more remote areas, fuel is often more expensive because of the higher transport and supply costs, but according to RAC fuel spokesman Simon Williams, this doesn’t apply to motorway stations: “We can see no reason why motorway fuel should be so much more expensive. In fact, arguably it is much easier from a delivery point of view than it is getting fuel to urban filling stations.”

Motorway fuel price signs

A new pilot scheme by the UK Government is installing electronic boards on the M5 between Bristol and Exeter that display motorway fuel prices. Similar systems can be found in countries like France, and if the trial is deemed successful, more motorways across the UK will see electronic signs posting fuel prices. This would provide some much needed price transparency for motorway drivers.

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What is the rural fuel rebate?

The rural fuel rebate is a scheme operated by the UK Government that cuts 5 pence per litre from fuel prices in 17 of the country’s most rural areas. It was approved by the European Union and now benefits over 125,000 people living in areas like the Scottish Highlands and the Lake District.

These areas are often harder to reach, forcing forecourt to charge higher prices to account for the higher cost of supply. The rural fuel rebate aims to let residents and those travelling in these areas to benefit from cheaper fuel.

What's your view on fuel prices in the UK? Do we pay too much for our petrol and diesel? What would you do about it? Join the debate in our comments section below...