Fuel retailers keep 4p-per-gallon out of 5p duty cut aimed at drivers
Fuel price data for April shows no sign of relief for drivers struggling with the sky-high cost of filling up, while greedy retailers have pocketed nearly all the tax-payer cash earmarked for drivers in the spring budget statement.
In March, the Chancellor of the Exchequer wheeled out a 5p-per-gallon tax reduction on petrol and diesel. At the time of the announcement the government proclaimed: “Unveiling a Tax Plan to give families further help with the cost of living, Rishi Sunak reduces fuel duty on petrol and diesel by 5p per litre for the next year.”
According to RAC Fuelwatch estimates, far from reaching drivers’ pockets, April saw filling station bosses increase their own margins by a hefty 4p a gallon – effectively soaking up most of the cash supposedly earmarked for motorists.
The latest retailer margin estimates add weight to criticisms of Rishi Sunak’s approach, as the chancellor had ignored pleas to reduce VAT on fuel instead of targeting fuel duty. This would have ensured the targeted help reached its proper destination, instead of lining the pockets of filling station owners.
Speaking soon after the budget statement, RAC fuel spokesman Simon Williams said: “Had the Chancellor temporarily cut VAT rather than fuel duty on fuel, as we asked him to do, the impact on pump prices would have been immediate with drivers benefitting straight away. Cutting VAT would also have gone some way towards shielding drivers from future increases – something a cut in duty just can’t do.”
Over the course of April, the average price of petrol fell by just 0.5p to £162.75p a litre, while the average diesel price stuck at £177p a litre. That’s still only a few pennies under the record highs recorded in March, and analysts predict more pain to come.
“Although the price of oil has cooled considerably, there’s still plenty of uncertainty in the market which is leading to prices jumping around a lot,” says Williams. “This coupled with the exchange rate worsening isn’t good for drivers and news that the EU is planning to phase out Russian oil is likely to cause the barrel price to rise.”
Current prices mean it costs around £90 to fill a 55-litre family car with petrol, and £97 for diesel. Assuming a typical consumption of 40mpg, that means running a petrol car uses 18.5p of fuel every mile, while a diesel uses 20p a mile.
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…
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