UK petrol and diesel prices: fuel costs are sky high despite 5p duty cut

Mike Rutherford

Russia’s invasion of Ukraine has sent a shock through the global oil market that means UK motorists are now being forced to pay an average of £1.67 a litre for unleaded. With greater pressure on diesel prices, UK drivers must pay even more, and latest RAC figures report an average cost of £1.79 a litre.

However many motorists are already paying significantly higher prices per litre than those averages, with reports of diesel and premium grade petrol prices breaking the £2 a litre barrier by large margins on some forecourts.

According to the RAC, the duty cut could lower the cost of filling an average family car from £92 to £89 if filling up with petrol, or from £98 to £95 when filling with diesel.

“We’re pleased to see the Chancellor has given drivers some much-needed relief at the pumps, but the reality is that a 5p cut in duty is something of a drop in the ocean,” says RAC spokesman Nicholas Lyes. “In reality, reducing it by 5p will only take prices back to where they were just over a week ago.”

Earlier hopes that the crisis in world oil markets had eased slightly were dimmed this week, as wholesale prices started to rise again. RAC fuel spokesman Simon Williams said: “The window for pump prices to come down appears to have been well and truly closed, with both oil prices and therefore wholesale fuel costs once again rising after last week’s big drop, putting yet more pressure on households and businesses. In just the last week, the average cost of a litre of petrol has gone up 3.5p and diesel by a staggering 5.5p. 

The RAC has also pointed out that ensuring all drivers fairly and fully benefit from the fuel duty cut depends entirely on retailers reducing their prices, instead of retaining extra profit. Prior to the budget announcement, the RAC had been calling for a VAT cut instead, which would have ensured the relief would be passed to drivers.

Looking ahead, experts told an MPs select committee on 14 March that further rises were likely in the cost of a barrel of oil, as countries scrabble to replace supplies from Russia. Nathan Piper, oil expert at financial services firm Investec told MPs: “If more stringent actions are imposed upon Russia, and five million barrels a day is truly taken out of the market, then oil prices would really have no ceiling.”

PM Boris Johnson travelled to the Middle East on a mission in mid-March in an effort to get nations like Saudi Arabia to open the taps wider. 

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.

Experts predict high fuel costs will be with us for the foreseeable future, and it’s not just down to the crisis in Ukraine – energy costs have been high for the best part of a year already as demand surged as the world emerged from lockdown.

Part of the problem is down to the fact that relatively low barrel prices in recent years have put plans to drill for new reserves on hold. That’s true in Africa, the US and South America, and while the current high prices may increase interest in exploring new reserves, it can take years for new wells to come on stream in volumes required to affect the market.

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.

Recently, 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. However the fact that we get a higher percentage of diesel from Russia than petrol means the advantage has swung the other way again.

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…