Why Britain's fuel prices are so high

Since 2008, petrol prices have jumped beyond historic norms to hit new highs. Simon Wilson investigates what's causing Britain's fuel price to rise.

Since 2008, petrol prices have jumped beyond historic norms to hit new highs. Why? Simon Wilson reports.

Is fuel really dearer than it was?

The price of vehicle fuel in Britain has surged over the past decade, compared with its long-run average. It is now far more expensive, even in inflation-adjusted terms, than at any time since World War I.

The AA publishes a wealth of fuel price data going back to 1896, available on its website. If the data are converted into (post-decimalisation) pence per litre, it reveals that prices rise very gently for the first half of the 20th century. Prices spiked during World War I, but the cost of a litre of petrol in nominal terms was still only a handful of pence per litre (ppl) right up until the 1950s.

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From the 1960s on, prices began to climb. At first the rise was gradual, with the price hitting 20p by the end of the 1970s and then climbing rapidly, with generally higher inflation, to pass 100p in the late 2000s. From there it has continued surging to today's levels. The key question is why.

What about in real terms?

When inflation is taken in account, a remarkable picture emerges: throughout the 20th century, even as motoring evolved from an elite hobby into a system of mass popular transport, the price of fuel remained surprisingly stable fluctuating within a band of around 60p to 100p (expressed in 2010 prices adjusted for inflation).

The exception was the 1914-1918 war, when prices spiked to just over 200p (in 1917) before returning to normal levels by the early 1920s. Other than that, the price of road fuel hit lows (of around 60p) in the late 1920s and late 1940s, and hit a high just above 100p in 1956, the year of the Suez crisis.

And later in the century?

From the 1950s onwards, prices trended very gently upwards, with lows (of around 75p) in the mid-1970s and again in the early 1990s, and highs (of around 100p) in 1975 and again during the early 1980s. What's most striking, however, is what has happened over the past 20 years namely a steady upward climb in real-terms prices, from about 75p in the early 1990s to around 110p by 2000.

For most of the 2000s, real prices then eased, and were under or around the 100p mark (in adjusted 2010 prices) until 2008. Since then, they have surged to today's unprecedented levels of petrol prices consistently above 130p and even higher for diesel. Until about 2008, then, it was possible to argue that fuel prices, though high, were still broadly within historic norms. Now it isn't.

So what's going on?

Historically, the price of fuel at the pumps is closely correlated to the price of crude oil, which has surged over the past decade, and now accounts for around 40p, rather than 10p, of every litre sold. In addition, the UK government has dramatically increased the taxes it levies (in the form of fuel duty and VAT).

According to the Office of Fair Trading (OFT) report into competition in the sector, published last month, the (nominal) price of petrol paid on average at British pumps jumped from 76p in 2003 to 136p in 2012 (a rise of 79%). The jump for diesel was greater a leap of 82% from 78p to 142p.

No wonder motorists are feeling angry and bruised. But the OFT also found that of the 60p rise in the price of petrol, 33p was made up of the rise in the cost of crude oil, and 24p was an increase in tax and duty.

How much profit does that leave?

According to the OFT's investigation and analysis, "the margins being made by UK refiners, wholesalers and retailers do not appear to have contributed as significantly to increases in pump prices". On petrol, the combined gross profit being made by refiners, wholesalers and retailers has risen 3.4ppl over ten years for petrol (a 14% real terms increase) and 7.2ppl for diesel (41%, much of it put down to higher profits being made by refiners due to high Europe-wide demand).

As things stand, on a litre of unleaded at today's average cost of £1.36, 81p goes to the government, 44p is the cost of crude oil, and 11p is the combined gross margin for the refiners, wholesalers and retailers.

How does the UK compare internationally?

The OFT report cleared the industry of anti-competitive practices, such as "rocket and feather" pricing tactics (whereby prices shoot up like rockets but only fall like feathers). However, it was released to a chorus of scepticism from motoring lobby groups. Nonetheless, international comparisons do tend to add considerable weight to the claim that British prices are high due to high taxes rather than industry sharp practice.

Before tax, Britain has one of the cheapest petrol prices of the 27 EU states, but after tax it's one of the most expensive. When it comes to diesel, the picture is even more stark: before tax Britain has the fifth cheapest diesel in the EU, but after tax it is easily the most expensive. Only Italy and Sweden come close.

What's next for consumers?

Motorists can't expect any more help from the Office of Fair Trading, which says there's no basis for a more detailed investigation. Even though the number of British forecourts fell from 10,867 in 2004 to 8,677 in 2012, the OFT found retail competition remains strong, and that the growth in market share by the supermarkets (from 29% to 39%) has helped keep prices low.

It will look into local cases of alleged anti-competitive practices, such as in the Western Isles of Scotland, where competition is minimal. It also found that on average prices are 8p higher at motorway service stations, and called for road signs displaying prices to drivers before they pull in.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.