The Price of Fuel
What causes the price of petrol to change over time? Where does the money you pay for a litre of petrol really go and do you know what you are actually paying for? All your fuel related questions should be answered here.
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Price of Petrol in the UK
Trends and Fluctuations
Fluctuations in fuel prices are a common occurrence. For the most part an upward change in the price of petrol, diesel and other fuels is caused by a variety of factors, such as:
- Market forces (inflation, seasonal demands, taxes, cost of crude oil and refined fuel)
- Global events (wars, gas shortages, security threats to oil supplies), and
- New technology (alternative fuel sources, new types of vehicles)
Everyone has at some time experienced the shock of a sudden, dramatic price change for fuel. For example you may find heading into a holiday weekend the price of fuel will suddenly sky-rocket overnight. It is largely a case of supply and demand – record numbers of drivers tapping into a dwindling supply of oil.
Although regular fluctuations occur, the price of fuel has been steadily rising for many years. In the first half of this year, the average price of unleaded petrol increased by nearly 10 pence per litre and is expected to climb.
Historical Fuel Price figures
Here is a snap shot of average prices for a litre of unleaded petrol in the United Kingdom from January 2007 to date which will give you an idea of how quickly and dramatically fuel prices can change:
Costs for a Litre of Fuel
The graphics below explain the costs that make up the price of a litre of unleaded at 132.9p and a litre of diesel at 137.9p so you can see who’s getting the biggest slice of the petrol pie:
In the UK we apply a fuel duty which is essentially an additional tax that is added to the price of petrol before it is sold. This duty extends to all Hydrocarbon fuels such as petrol, diesel, biodiesel and LPG’s that are sold for use in cars and makes up a significant proportion of the price we pay for fuel.
As this duty is applied to the price of fuel before VAT, any change to the level of duty will also have an affect on the amount of VAT you pay. When the government announced it’s budget this year (March 2011) the rate of fuel duty was reduced by 1p to try and stabilise the price of fuel which is 5p less than it would have been with inflation plus the planned 1p rise. To compensate for the reduced duty rate the government has increased the tax for oil companies by up to as much as 32%.
The second largest portion of the cost of fuel goes to the companies who supply the crude oil and those who refine it into fuel products like petrol and diesel. Incidentally the cost of refining diesel is substantially higher than that of petrol which, along with VAT makes the price you pay for diesel higher.
The petrol you buy at the pumps is subject to VAT which is another addition to the cost of all consumer fuels. The introduction of a new VAT rate of 20% at the start of 2011 saw the price of petrol rise further still.
If you always thought the high prices you pay at the pumps were down to the high markup added on by the greedy petrol stations you might be surprised to learn that in fact the retailers’ slice of the price of petrol is the smallest of all.
The reason for their low percentage because there is little room for margins as the price of fuel is already so expensive before it reaches the retailer. The competitive nature of the petrol stations to have the lowest price is also an important factor in the money they make from the price of a litre.
Changes in the oil industry have significant effects all around the world. Crude oil (which is refined to form petrol) is the world’s most actively traded commodity and in 2005 the price of crude oil rose to prices which hadn’t been seen since the 1970′s oil crisis. Since then, the price of oil has gradually risen.
The demand for oil
Global economic expansion is adding to the highest demand for oil in many years, particularly higher grade crude oil which is suitable for petrol production. In order to be more efficient, oil companies operate with lower stocks than in the past and this means that if there are supply interruptions there will be more of an effect on oil prices as there is not a huge back up supply.
What affects oil prices?
War, violence, racial tensions and natural disasters have all had an effect on oil prices in recent years. If supplies are kept low and an event which may cause problems with exporting oil from that area occurs then prices inevitably rise. Violence in the Middle East, ethnic tension in Nigeria, hurricanes and oil spills such as the BP oil spill in 2010 that affected the Gulf of America are examples of this.
What effects does increasing oil prices have on petrol?
When oil prices soar, there is a knock on effect on petrol and diesel prices as they cost more to produce. Many people feel that fuel tax is the major contributor to petrol prices in the UK but, in recent years, the rising price of crude oil has also been a major factor in the ever-increasing pump price.
Fuel tax is an imposed sales tax put on the sale of fuel. Frequently, fuel tax is looked upon as a source of general revenue, with some being put towards the maintenance of roads and highways.
Fuel Tax in the UK
Fuel tax in the UK is constantly changing and has risen steadily over the last 15 years. Between 1993 and 1999 there was a rapid increase with duties on fuel increasing by 3% above inflation. This was due to a major change in petrol taxation in 1993 when the Conservatives introduced the Fuel Price ‘escalator’. This was a way of the government making money and also to help protect the environment by discouraging people from using their cars.
Fuel Escalator Forces Prices Up
This fuel escalator forced prices up from one of the lowest in Europe to now one of the most expensive. When it was first added, fuel prices rose by 3 pence a litre and tax contributed to 72.8% of the total cost. By 1997 the escalator had added 11.1p to the cost of unleaded petrol and was at 75%. It didn’t get any better when the conservatives left office and Gordon Brown took over, as the escalator increased and 3 pence was added per litre. This took tax up to an incredible 81.5% of the total price of fuel.
Fuel Tax and the 2000 Fuel Protests
Despite the fuel escalator being abandoned in 1999, fuel prices did continue to rise rapidly, with a 2 pence a litre rise after the 2000 budget, contributing to the fuel protest. These rises were however argued by the government to be as a result of increasing oil costs rather than tax increases. This argument does hold some truth when we look at the graph above, showing that although the overall price of fuel has risen, the percentage of tax has stayed relatively constant and even dropped slightly this year.
In April 2005, tax on petrol and diesel were charged at 47.1 pence a litre which with VAT added also, the total taxation makes up a huge 69.9% of the price we paid for unleaded and 67.3% for diesel.
British drivers pay two taxes on petrol they buy at the pump and fuel campaigners complain about the fact that VAT is charged on the cost of fuel and the duty and feel it should only be calculated on the cost of the fuel for a fairer petrol price.
Duty on fuel in the UK increased again on 1 October 2007, with an increase of 2.00 pence a litre on unleaded and diesel and an even greater increase on LPG and natural gas. See the fuel duty for all fuels below:
Fuel Tax Figures
Here you can find the fuel tax figures and, or budgets from 2007 up until this year.
2007 Fuel Tax Figures
2007 fuel duty (as of 1 October 2007) in the United Kingdom was:
- 50.35 pence per litre for ultra-low sulphur unleaded petrol/diesel
- 53.65 pence per litre for conventional unleaded petrol
- 56.94 pence per litre for conventional diesel
- 30.35 pence per litre for bio-diesel and bio ethanol – low tax to encourage consumer conversion
- 16.49 pence per kg for gas other than natural gas (LPG)
- 13.70 pence per kg for natural gas used as road fuel.
- 9.69 pence per litre for rebated gas oil (red diesel)
- 9.29 pence per litre for rebated fuel oil
As of 1 October 2007 effective rates of duty for non-road fuels increased by 2 ppl. These rates are set to be increased by the same percentage as the main road fuels on 1 April 2008 and again on 1 April 2009.
From 1 October 2007 duty rates for unleaded petrol, leaded petrol, aviation gasoline and other heavy oil used as road fuel were increased by the same percentage as the main road fuels.
2008 Fuel Tax Figures
On 1 December 2008 a permanent 2p increase in fuel tax was introduced to offset the rate cut in VAT from 17.5% to 15% bringing the duty rate for the main road fuels up to 52.35p per litre.
2009 Fuel Tax Figures
2009 fuel duty (as of 1 September 2009) in the United Kingdom is:
- 56.19 pence per litre for main road fuels, unleaded petrol and diesel
- 65.91 pence per litre for leaded petrol
- 36.19 pence per litre for biodiesel and bioethanol
- 22.16 pence per kg for road fuel natural gas
- 27.67 pence per kg for road fuel liquefied petroleum gas (‘LPG’)
On 1 April 2009 the duty rate for unleaded petrol and diesel was icreased by 1.84 ppl to 54.19p per litre and again on 1 September 2009 by 2 ppl to reach the level of 56.19 per litre. These rates were planned to be increased further on 1 April 2010 to 2013 by 1ppl above indexation each year.
2010 Fuel Tax Figures
On the 1st January 2010 the VAT rate reverted to 17.5%. The 3p fuel duty rise scheduled for early 2010 was delayed in 2010 Budget with the duty going up by only 1p a litre on the 1st of April. This went up by another 1p a litre on the 1st October 2010 and is scheduled to go up by 0.76p on the 1st January 2011.
2011 Fuel Tax Figures
A 0.76p increase on the 1st January 2011 brought the duty rate for the main road fuels up to 58.95p per litre. This coincided with the 2.5% increase in VAT rate, which is now at record high of 20%.
2011 Coalition budget
On the 23rd of March 2011 the government announced a number of tax changes which could affect the price at the pumps.
There was an immediate £0.01 per litre cut in the hydro carbon duty rates which meant duty fell to 57.95 pence for both petrol and diesel.
The Government also announced a “fair fuel stabiliser” policy which stated that when the price of oil was above a target price (75 USD was proposed for consultation) as it was on 23rd of March 2011, fuel duty would increase by CPI inflation currently 4.4% per year (5.88 pence based on an average price of unleaded of £1.34 for that day) starting on the 1st of January 2012.
The fuel duty escalator which was abolished was based on CPI measure of inflation and the Government has also said that if the oil price were to fall below the target price on a sustained basis then they will increase the duty by RPI plus 1 penny. Using RPI rather than CPI at today’s rates for both would see an increase of 1.49 pence per litre because of the change of indexation measure alone.
The Government is also proposing to start a fuel duty rebate pilot scheme to help the Scottish Isles affected by high fuel prices seemingly acknowledging lack of competition between retailers and increased distribution costs in those areas. If approved by the EU, 5 pence per litre rebate could apply to all affected areas.
The Government has proposed that a supplementary charge which is currently applied to oil and gas production at 20% goes up to 32% immediately generating extra income for the Exchequer.