Petrol prices: Are we paying too much at the pump?

In November the cost of petrol at the pump reached a record high of £1.47 a litre, and yet just two years ago it was at a low of about £1 a litre.

Why has the price of petrol been fluctuating so dramatically, and are motorists now being overcharged?

Why has the price of petrol gone up?

Since then, economic confidence has returned in fits and starts, but suppliers haven’t always been immediately able to meet rising levels of demand. This has caused the price of crude oil, and products derived from it, to rise.

If wholesale prices have fallen why hasn’t petrol come down too?
Petrol retailers don’t always pass on all of the changes in wholesale energy prices to their customers.

According to the RAC motoring organisation, petrol retailers are keeping prices unnecessarily high.

The RAC’s Simon Williams accuses retailers of thinking they can “get away with” taking some of the gains in extra profits.

He says it proves the old adage that prices go up like a rocket but fall like a feather.

Petrol retailers disagree with this, and point out that it’s not a question of profit – they have to cover the costs of running a business.

These have been increasing for two reasons, according to the Petrol Retailers Association, a body which represents independent retailers.

Firstly, electricity prices and wage bills have been rising. Secondly, people are buying less fuel. Customers bought 15% less over the last year, compared to before the pandemic.

It says that if you take a longer perspective, margins of 9-10% are not unreasonable.

What else determines the price of fuel?
Even if retailers passed on all the changes in the wholesale price, down to the last penny, it wouldn’t have as big an impact as you might think. That’s because the cost of the fossil fuel itself is only a fraction of the final price that customers pay.

More than half of the price tag at the pump is tax of one kind or another.

Another factor is the price of bioethanol, which is added to fuel to help reduce greenhouse gas emissions. Although it’s a small part of the overall price, it’s more expensive than petrol and diesel and its price has nearly doubled over the past year.

These added costs help explain why fuel prices vary so much between countries too. The UK currently ranks near the top of the list, although motorists in Scandinavian countries, the Netherlands, Israel and Greece all pay more.

Will petrol prices come down?
That depends on supply and demand in the world energy market, and will continue to be affected by the course of the pandemic, says the consultancy Portland Fuel.

The pound’s exchange rate has an impact too, since fuel is priced in dollars, and a weaker pound will push up the price.

The government isn’t likely to cut tax on petrol any time soon. Fuel duty provides a significant source of revenue for the government – £28bn in 2019-20, according to the Office for Budget Responsibility. That’s 3.3% of the overall tax take, equivalent to £1,000 per household.

Do we even want the cost of petrol to come down?
There’s an argument that now is not the time to make fossil fuels cheaper.

Not only does a higher fuel price boost the government’s tax take, but it may encourage more people switch to public transport or to electric vehicles.

Simon Williams from the RAC is doubtful. He says the cost of new electric cars, and the lack of second-hand models, will still stop a lot of people from making the switch. And even if the cost of petrol is high, he points out that rail travel is still expensive compared to driving.

However, Gill Nowell, head of electric vehicles at LV= General Insurance says that while the price of an electric car is higher the running costs, including charging and maintenance can be almost half that of a similar petrol or diesel model.

If you lease a car, she says, the lower running and charging costs mean “most electric cars come out cheaper”. And the higher the price of fossil fuels, the more favourable the calculations for EVs become.