Car News 07/09/2018

Why is Fuel so Expensive?

The costs of filling up seems to be climb higher and higher, but what makes up the cost of a litre of fuel? Motoring journalist, John Swift, takes a look.

If you feel your purse or wallet is lighter after you’ve filled your car or van up with fuel these days, you’re right – petrol and diesel are relatively expensive at the moment compared to previous years.

As of early September, the average price of a litre of petrol stood at 130.76p (£5.88 a gallon) and diesel 133.42p (£6.00 a gallon). Taking an average car (a Ford Focus with a 55 litre tank) it costs £71.92 to fill that up with petrol, £73.38 if it’s a diesel; 12 months ago the equivalent figures were £64.71 and £65.34.

So you’d be correct in thinking that fuel is getting more expensive, but in fact it fluctuates quite regularly, sometimes going up and sometimes down and for a staple commodity in our daily lives that’s pretty unusual. To give you just a few examples, at the start of 2016 petrol cost 101.5 ppl (£4.56) and diesel 100.8 ppl (£4.53). Going the other way, in April 2012 petrol was 142 ppl (£6.39) and diesel 148 ppl (£6.66). Those are big differences to today’s pump prices.

As an historical aside, the lowest forecourt prices in the last decade were early in the recession, in February 2009, when petrol was just 85 ppl (£3.82) and diesel 97 (£4.36).

Woman filling up a red car with fuel at a a filling station

So what’s behind it, why does it go up and down so much?

Well, tax is the obvious and biggest component. Even though fuel duty has been frozen since March 2011 at 57.95 ppl (£2.60 a gallon) for both petrol and diesel the Treasury still makes a fortune from drivers. To show you how big a cash cow fuel is to the government, just consider that in 2017 UK drivers bought 10.5 billion gallons of fuel so if you do the maths that means the Treasury took £27.3 billion in fuel duty alone.

Of course, that’s not the end of it because as well as fuel duty we also pay VAT and this is a central argument of fuel campaigners who say we are being taxed twice for the same purchase. A fair point, many might say. In fact, looking solely at the cost of fuel with all the tax and duty stripped out, our fuel is some of the cheapest in the EU, 24th out of 28. By the time you come to pay the that has risen to the 12th most expensive.

In round terms, 60% of the cost is tax in one form or another.

The petrol retailers take a small amount, around 6.5 ppl, to cover their costs and profits, and there is around another 2 ppl for the cost of the tankers driving around the country delivering it to the forecourts.

Which leaves the one element governments can do little about, the cost of crude oil being sold on the international market. This is the single most traded commodity in the world and prices are affected by many factors; seasonal demand, risk assessments of the producer countries, the amount being drilled and stockpiled, confidence/nervousness about the global economy and demand for oil and so on.

Since the start of August, the price of a barrel of Brent crude (an international benchmark used by the oil market and investors) has gone up by £4.23 and over the past year by £19.12 to stand at £60.40 as of September 3rd, so you can see there are dynamics at work, way beyond the control of any one government - which may be of little comfort to those for whom the cost of motoring is getting ever harder to manage.

And there is one obvious thought to end on. Given that fuel taxes contribute so much each year, what happens when we all start driving around in electric cars? The Treasury will have to fill that £27 billion hole somehow…

Should you pay for fuel upfront? How can I drive more efficiently?


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