Why have petrol prices risen and will they go down again?

Fuel prices in the UK are higher than they’ve ever been before, with the average price for a litre of petrol hitting 191.5p over the weekend and diesel hovering at just under £2.

Rising fuel prices, both for vehicles and home heating, have been the primary driver for the latest spate of inflation, with most households now feeling the pinch of the cost-of-living crisis.

As evidenced by the large demonstrations that choked up parts of Britain’s motorway on Monday, many people are angry about the situation and are demanding that the government do more to cut fuel duty after the Chancellor’s 5p cut back in March failed to halt price rises.

While Rishi Sunak suggested that he may look at ways to reduce the price of fuel further, the Chancellor resigned this afternoon unexpectedly, so we don’t know what his replacement will do about the situation, and government can only do so much given that the majority of the cost of a litre of fuel is dictated by the price of crude oil.

Why have fuel prices gone up?

Although the tendency has been to blame Russia’s invasion of Ukraine for the rise in fuel prices, this ignores the fact that fuel prices were on an upward trajectory long before then.

In April 2021 oil prices collapsed due to reduced demand in light of the pandemic. OPEC, the international cartel of oil producing countries that controls 40% cent of the world’s crude oil supply, drastically cut back on oil production in response to reduced demand.

But as economies got back to normal and demand for oil once again increased, output from OPEC countries did not rise at the same rate, leading to relative scarcity on the global oil market, driving up prices.

This strategy of selling less oil at much higher margins has proven extremely lucrative for the oil industry, with Exxon Mobil, Shell, Chevron and BP all posting record profits in 2021.

Russia only accounts for around 10% of global oil supply but because of western financial sanctions on the country, selling that oil to the West has become a lot more difficult.

This hasn’t greatly impacted Russia, which has simply diverted more of its supply towards willing customers in China and India, but it has left something of a supply gap in the West, which OPEC countries have refused to fill by significantly ramping up production.

Also affecting fuel prices is the fact that oil is traded in dollars and the value of the pound has fallen against the dollar in recent months, making it more expensive to import.

Are forecourts profiteering from the crisis?

Despite everything, the price of a barrel of crude oil has fallen slightly over the past five weeks, which means that fuel companies are now paying lower wholesale prices for fuel. This has not been reflected on forecourts with prices continuing to rise.

Motoring groups such as the AA and RAC say that it should take no more than two weeks for falling wholesale prices to be result in lower prices at the pump. In some cases, especially where supermarkets are concerned, fuel companies may take a month to reduce fuel prices due to contractual obligations with suppliers, but the price of oil has been trending slightly downwards for more than a month now.

What do petrol retailers say?

Fuel prices at a BP Plc petrol station in Essex, UK, on Monday, July, 4, 2022. Petrol prices in the UK surged to another record, triggering a wave of go-slow protests on the nations motorways. Photographer: Hollie Adams/Bloomberg via Getty Images

Petrol retailers obviously deny that they’re profiteering, though admit that margins on selling fuel have increased, justifying this on the basis of the slump in sales last year.

The Petrol Retailers’ Association (PRA), a body that represents independent forecourts, said customers bought 15% less petrol last year because of the pandemic so forecourts had to make higher profits on each litre sold to cover the costs.

Demand for petrol has now almost returned to pre-pandemic levels, meaning that a loss of pump sales isn’t an issue anymore. Despite this, prices have not fallen.

Gordon Balmer, executive director of the PRA, said that rising prices were related to international events and the weakness of the pound against the US dollar as opposed to actions on the part of retailers.

Why are people protesting about the cost of fuel?

People, many of whom rely on their cars to get to work, are finding it increasingly difficult to run those cars due to high fuel prices. There are knock-on effects throughout the economy too with, for example, higher food prices due to the increased cost of production and delivery, fuel bring a major cost for farmers and hauliers that needs to be passed on consumers.

How much is tax on fuel?

Fuel duty is levied at a flat rate of 52.95p per litre for both petrol and diesel, while VAT at 20% is then charged on both the product price and the duty. This means that as petrol prices rise, so does the government’s tax take.

How can I find the cheapest place to buy fuel?

Supermarket forecourts are generally still the cheapest sites to buy fuel, usually charging about 4p a litre less than average prices, even if they don’t currently seem to be discounting fuel in a race to gain market share like they once did.

How can I drive more efficiently to save on fuel costs?

This is a topic we’ve covered before on Driving.co.uk, and one of the best ways to cut down on your fuel consumption is to make sure your car is well-maintained, taking particular care to ensure your tyres aren’t under-inflated.

Remove any excess weight such as golf clubs or baby seats when not in use, as more energy is required to increase the speed of a heavy car than a light one.

Roof racks and roof boxes create a lot of drag through the air, with studies showing that an empty roof rack can increase drag (and thus fuel consumption) by around 16% at 75mph while a roof box adds about 39% more.

Slowing down by an average of 5-10mph can make your journeys more efficient without adding on a great deal of extra time.

Always drive in as high a gear as possible without letting the engine labour, and read the road ahead so as to be able to conserve momentum at junctions and roundabouts, avoiding harsh braking and acceleration cycles.

When might prices come down?

If the government makes another cut to fuel duty, motorists might see a small reprieve, but, worryingly, there are signs that fuel prices may not fall significantly at all.

The low production/ high margin strategy has proven very profitable for oil companies and, instead of reinvesting those profits into infrastructure that would enable the companies to increase oil production, last year they instead paid most of it out as shareholder dividends. Investment in oil production is currently running at near-record lows.

This could be a sign that companies have no plans to increase oil production in future, which may mean that the era of inflated prices is here to stay.