UK petrol and diesel prices: retailers fail to fully pass on savings

Mike Rutherford

Fuel retailers failed to fully pass on their savings to consumers when cutting petrol and diesel pump prices last month.

The average pump price of petrol fell by nearly 8.74p to 182.69p per litre in July, while diesel came down by 6.69p to 192.38p per litre. Although these represent the third and fourth biggest monthly fuel price reductions respectively in the last 20 years, the RAC has argued that retailers should have done more.

The wholesale cost of petrol has been falling for eight consecutive weeks, reducing by 20p since the start of June to 131.75p at the end of July. The last time unleaded was this price on the wholesale market was in May, which led to a UK average pump price of 167p per litre for unleaded.

As such, retailers are currently charging around 15p per litre too much for unleaded. The RAC estimates this is costing drivers an average of £9 extra on a tank of petrol. Diesel drivers, meanwhile, are typically paying £6 too much for a tank.

RAC fuel spokesman Simon Williams said: “July has been an unnecessarily tough month for drivers due to the big four supermarkets’ [Asda, Morrisons, Sainsbury’s, Tesco] unwillingness to cut their prices to a more a reasonable level, reflecting the consistent and significant reductions in the wholesale cost of petrol and diesel.

“As it was, we saw independent retailers leading the charge with fairer pump prices appearing all around the country, which eventually forced the supermarkets to finally implement a more substantial cut [on 29 July].

“What ought to have happened is that the biggest retailers cut their prices more significantly on a daily basis, given the wholesale price of petrol has fallen steadily over the last eight weeks. Instead, average retailer margin for petrol across the industry has been up around 20p a litre for the last two weeks – more than three times its long-term average.”

He added: “The best advice for filling up is no longer to assume the supermarkets are the cheapest, but to shop around, as it’s highly likely you’ll find an independent retailer which is doing the right thing and fairly reflecting their lower wholesale costs by charging a lower price.”

Fuel retailers have been investigated after accusations that the 5p-per-litre fuel duty cut was pocketed instead of being passed on to consumers. Business secretary Kwasi Kwarteng wrote to the boss of the Competition and Markets Authority (CMA), asking for an independent review and the review has now reported that the tax cut was indeed reflected in petrol and diesel prices.

The CMA report did raise concerns over the growing gap between the price of crude oil and the wholesale price of petrol and diesel fuel. Oil industry experts have suggested that this is due to limited refining capacity and low refined fuel inventories, identifying these as the main drivers of the fuel price crisis facing the UK. 

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…