UK petrol and diesel prices: Russian oil embargo threat causes new surge
News from the US that a boycott of Russian energy is being actively considered as a response to the country’s invasion of Ukraine has pushed the price of oil to nearly $140 dollars a barrel. The surge has led to predictions that the average price at UK petrol pumps could soon reach £1.75 per litre – it’s already reached similar levels at some of the UK’s pricier pumps.
Diesel currently costs an average of 155.23p per litre at UK pumps, with petrol at 151.67p per litre, according to the latest RAC Fuel Watch figures. However, there seems little doubt that more fuel price rises are on the way.
The surge in oil prices followed a suggestion from the US government that it’s talking to rival oil producers about increasing supplies in the event of a boycott of Russian energy – though there have been no formal announcements on any such sanctions on Russia yet. However, US Secretary of State Antony Blinken said yesterday that the US government and Western allies were discussing a potential ban on Russian oil.
The current high prices at the pump have yet to reflect the latest increases in the cost of a barrel of crude oil, but drivers are already facing soaring costs. RAC fuel spokesman Simon Williams said: “The average price of petrol across the UK has jumped by more than 4p in a week topping £1.55 for the first time ever which means a gallon costs over £7 – something which many older drivers will be struggling to comprehend. Diesel, however, has increased by 6.5p a litre to £1.61 or £7.30 a gallon.
“These hikes are unprecedented and will sadly be hitting both homes and businesses hard. It’s therefore vital the Chancellor acts quickly to limit the damage by cutting VAT to at least 15% which would save drivers 6.5p a litre and take the average price of unleaded back under £1.50. Importantly, this could also limit the impact of inevitable fuel price rises in the coming days and weeks.”
Russia is one of the world’s largest producers of oil and gas, so any disruptions to its production processes has a global impact.
With Russia having launched a full-scale invasion of Ukraine and facing international sanctions, there’s potential for significant disruption to supplies. Russia produces 4.5 million barrels of oil each day, and only Saudi Arabia produces more.
The sanctions levied against Russia so far have targeted banks and oligarchs rather than the country’s energy sector, but factors such as Germany’s postponement of the Nord Stream 2 gas pipeline will have an effect on the energy market overall. Russia also has the ability to reduce oil exports to Europe in a tit-for-tat response to economic sanctions, and experts suggest Saudi Arabian oil fields could struggle to increase production sufficiently to counter such measures.
“Opec, the oil producers’ cartel, is already struggling to meet its output targets as demand for crude rebounds following the easing of lockdown restrictions. This has pushed up prices, with analysts warning there is limited capacity to increase supplies if flows from Russia are affected by sanctions,” the Financial Times newspaper has reported.
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. 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.
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.
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.
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.”
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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