What affects the price of fuel?

What affects the price of fuel?

See all the factors affecting the cost you pay at the fuel pump.
4 min read
✓ fact checked
Here's what you need to know

✔️  Petrol, diesel, biodiesel and bioethanol fuels each attract a duty of 52.95p per litre.

✔️  The government is estimated to bring in £26.2 billion in 2022-2023 through the sale of road fuel.

✔️  Recently both Centrica and Shell reported profits which have shocked the UK public in the face of a cost of living crisis.

As we approach the winter months, all eyes are on the government as to how they will address the current cost of living crisis, with winter household bills set to soar and road fuel prices remain high. According to the latest figures by ONS, petrol prices rose by 18.1p per litre in the 12 months to June 2022, the largest monthly rise on record. 

There are many factors that impact how much you pay at the pumps. VAT, fuel duty, and wholesale costs are among the most commonly known items on your fuel bill. This article will break down these costs to display just how much of your money is being taken and in whose pockets it ends up.

Who’s responsible for setting fuel prices?

There is no government regulation on the amount a private company can charge per litre of fuel. 

Rightly, or wrongly, it has been left up to the markets to decide the price that the customer will pay. Set your prices too high and the customer will drive past your refuelling station to make a saving at another destination.

Conversely, as we have seen in the news recently, if you advertise too low a price it will attract too many customers and cause gridlock.

What is fuel duty?

Fuel duty is quite simply a tax added to each litre of fuel sold in the UK. The government is estimated to bring in £26.2 billion in 2022-2023 through the sale of road fuel. 

The amount we pay for fuel is subject to two separate taxes - fuel duty and VAT (value added tax). 

The cost of each litre of fuel can be broken up into three segments:

  • Fuel duty
  • Wholesale cost (the price the retailers pay)
  • Retailers' costs and profit margin 

The current rate of fuel duty as of August 2022

Petrol, diesel, biodiesel and bioethanol fuels each attract a duty of 52.95p per litre.

How do fuel prices work

Wondering why is petrol so expensive in the UK? Fuel prices are set by the forecourt owners. Service stations have come under intense public scrutiny, with fuel prices hitting record highs in recent months. Most of this public anger has been directed at the wrong people. 

Yes, fuel stations have been charging record-high prices, but that doesn't mean they are the ones making the record profits. The fuel retailers are operating on very thin margins, with increased costs in staffing and delivery eating into the profits. 

If we follow the money, we can see clearly it is the oil and energy producers who are the ones raking in the all-time high profits. 

Recently both Centrica and Shell reported profits which have shocked the UK public in the face of a cost of living crisis. Centrica, the owner of British Gas, reported operating profits of £1.3bn during the first half of 2022. 

While Shell has eclipsed investors' expectations by posting a profit of $11.4bn for the 3-month period April-June. 

Factors affecting petrol and diesel prices

Fuel duty and VAT aside, there are a few other important factors which can have a significant impact on the prices we pay at the pump:

  • The global price of crude oil 
  • Supply and demand of crude oil
  • Refinery production and capacity
  • The pound-to-dollar exchange rate (refined fuel is sold in US dollars)
  • Crude oil and refined fuel distribution costs
  • The margin fuel retailers decide to take

The latest fuel prices

Use the interactive graphs below to track the latest prices (courtesy of RAC):

How much tax do we pay on petrol?

After each of the costs mentioned above is added together, it gives the price before VAT. VAT is then charged on the total amount at 20%, meaning you are paying VAT on fuel duty.

That's right, the government are charging you 20% extra for the inclusion of fuel duty on your bill at the pumps. This clever accounting trick makes fuel duty 52.95p + 20%, calculating the true cost of fuel duty at 63.54p per litre

And that's not all. We still pay 20% VAT on the rest of the cost per litre. For example, if you topped up your vehicle at £2.00 per litre recently, you will have paid 20% tax on the whole transaction. A £2.00 per litre price at the pumps would be £1.667 before VAT is added.

This means that for every litre you pay at the pumps, the government would receive 33.3p in VAT, plus 52.95p in fuel duty. Out of the £2.00 you spend on every litre of fuel, the government benefits to the tune of 86.25p.

When does fuel duty go down

Fuel duty only changes when the government announces it will. The most recent change in fuel duty was a 5p per litre reduction in the spring budget this year, announced by former chancellor Rishi Sunak. The government has also frozen it for 2022 and 2023, estimating a £5 billion saving over the next 12 months (or £100 for the average car driver). 

How to find the cheapest fuel

There are many apps and websites available that use your current location and map out where the nearest deals are to you. We use Confused.com’s interactive fuel prices tool.

It’s super easy to use, and it even shows how much you’d be saving on average if you pick the cheapest petrol station near you.

If you’re driving an EV, you should check out our article and find some of the best apps for electric car owners currently available! If you’re driving an EV and not really worried about the cost of diesel and petrol, you should browse the latest best EV home energy tariffs, and see if you can save! 

Are electric cars affected by fuel duty?

Currently, there are no plans to introduce fuel duty on electric vehicle charging, although there have been suggestions and consultations on how to future-proof fuel duty revenue as we make the shift towards a greener economy. 

If you are an EV owner and charge from home the government will receive 5% VAT on that transaction, as this is the tax rate applied to your household energy bill. 

If you are an EV owner who charges using a public charger then you will be taxed at 20% VAT.

This is one of the reasons we are seeing record high prices to charge outside of the home. 

How could the UK government introduce fuel duty on electric cars?

Smart meters are evolving and in the future, I foresee all new installations of smart meters to track EV charging on a separate meter, which could then have an increased VAT, or fuel duty, electricity tariff applied to it. This would prevent households from being charged extra on top of their normal energy usage. 

The government could opt to scrap fuel duty and replace it with a pence-per-mile driven charge. 

This model is currently used in other countries and is a way to directly tax the vehicles that use the roads the most, which is considered to be a fairer method of taxation. This could be easily tracked through the annual MOT of vehicles which is recorded on the government database.

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