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UK petrol and diesel prices: fuel could drop to around £1 at pumps

Petrol and diesel prices are dropping ever-closer to the £1 mark, with the value of crude oil fluctuating dramatically

Kia Niro long-term - petrol station

Petrol could fall below £1 per litre at the pumps, with diesel not far behind, as a result of the coronavirus crisis.

The latest data from RAC Fuel Watch pegs the average pump price of unleaded at 112.56p per litre and diesel at 117.18p per litre. The organisation has suggested, though, that these could fall as low as 98p and 108p per litre respectively.

Over the course of March, the average price of a barrel of crude oil plummeted 66 per cent, from $50 (£40) per barrel to under $18 (£15) per barrel - the lowest level in 18 years. Since then, the value has risen again and is now sitting at just over $30 (£24) per barrel.

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Nevertheless, depending on where the trend goes from here and how much of their savings retailers pass on to customers, petrol and diesel pump prices at UK forecourts could tumble as low as £1.

RAC fuel spokesman Simon Williams said: “Wholesale fuel prices have slid so far that there remains scope for further price cuts, but we are very mindful at this time of the pressure this can place on smaller, independent forecourts that provide a vital service in areas where there is no supermarket footprint.”

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This news comes after Asda and Morrisons - two of the 'Big Four' supermarket retailers - have slashed the price of petrol and diesel at their forecourts by 12p and 8p per litre respectively.

What makes up the price of UK 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.

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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. 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.

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 supermarket fuel cheaper than an independent forecourt?

Supermarket forecourts usually offer the cheapest fuel prices 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. 

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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 fuel so expensive on motorways?

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.”

Why is diesel more expensive than petrol?

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. In addition, diesel prices are pushed up by the cost of the additives that go into the fuel.

Furthermore, the gap between UK petrol and diesel prices widens during the winter. The end of the US “driving season” means retailers have a surplus of petrol they can’t export, so they sell it here at a lower price. Diesel demand, meanwhile, increases across continental Europe, where the fuel is commonly used in heating oil.

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.

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...

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