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Why Does Fuel Cost What it Does?

One of the most important and volatile retail prices we have to worry about here in the UK is the cost of the petrol and diesel we put in our vehicles. It's one of those things we don't like paying what we feel is too much for, but there also doesn't seem to be a whole lot we can do about it either. When the price goes up it's easy to blame those gigantic oil companies with their CEO's with multi-million pound pay packets, but there's a lot more to the cost of fuel than just profit margins. So here's an explanation of just how retailers arrive at the price you see on their forecourts.

Retail profit margins

Whenever we see a price of something as what we consider to be high, it's only natural to assume someone's making a big profit at your expense. As far as vehicle fuel is concerned, someone is making a huge margin on a gallon of petrol or diesel, but it's not the retailer, that's for sure. At best, the supermarket or garage will be making maybe one or two pence per litre. Most of the time, supermarkets may actually be selling fuel at a loss, especially in an area where there are a number of different supermarkets competing to get shoppers through their doors.

Wholesale costs

It's often said that fuel prices go up like a rocket when international oil prices rise, but come down like a feather when crude prices go the other way. There's undeniably an element of truth to this, but the wholesale price of petrol or diesel doesn't have as much of an effect as we might expect as it actually represents a relatively small proportion of the retail price. There is one body making a huge amount of money out of every litre of petrol and diesel sold, but it's not the retailer or the oil company we're talking about.

The Exchequer

That's right; the vast majority of money we hand over for fuel goes in tax to the government. Although the actual amount doesn't vary anywhere near as often as other elements making up the price of a litre, those other elements have a small effect on the overall price as tax makes up so much of the total price. We're not just taxed once either. As well as fuel duty, we also have to pay VAT, and that means we're paying tax on tax!

The breakdown

As of March 27 2017, the average cost of a litre of diesel in the UK was 119.95p, while a litre of petrol came in at an average of 118.24p. Of that, 57.95p is fuel duty, so almost half the entire cost of a litre is down simply to fuel duty. The actual cost allocated to production, supply, transportation and the profit margin was 40.58p (34.32%) for petrol and 42.01p (35.02%) for diesel on average. Of course, that's not the end of the story as there's also the small matter of VAT at 20%.

So, when we pay for our fuel at the pump, around 65% of everything we pay is tax. Fuel duty may have been frozen at 57.95p per litre since as long ago as 2011, but it still represents the majority of what we pay for our fuel. To put things in perspective, the average price of a litre of petrol in the USA on 27th March was 54p at current exchange rates.

11 April 2017

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