The True Cost Of Petrol

[Raistlin]

Filling up your car has become more expensive in recent years – and the cost could rise higher still. But, with the price of a barrel of oil down 40% from its peak, why are petrol costs still increasing ?

What are you paying for when you fill up at the petrol pumps on one of Britain's forecourts? It's something many of us wonder, particularly when the price of oil is falling.

But there are a number of factors at play. Read on as we lift the lid on the true cost of petrol.

The 'black gold' factor

Oil is a crucial factor in the price of petrol. With Brent crude at an 18-month high of about $87 (£56) a barrel, rises in the wholesale price of fuel have produced steady petrol price increases since the beginning of the year.

Having said that, the price of oil is a far cry from its peak of $147 reached in July 2008 - some 69% higher than today.

That spike was driven by soaring demand from China and other developing nations, dwindling petroleum reserves, increased unrest in the Middle East and greater pressure from oil speculators.

China is still displaying a healthy thirst for oil. This has helped to push Brent crude up by more than $35 (£23 at today's exchange rate) or 67.6% in the past 12 months, according to figures from investment website Digital Look.

Speculators push up prices

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Image: Digital Look

Graph showing the price of Brent crude this year

Petrol refining companies and investment banks can push the price of petrol higher through speculation - that is, investing in a commodity to try to influence the price by limiting supply.

With global interest rates at a prolonged low and the stock market rally appearing to have run out of steam, speculators know that investors will be looking for returns from other asset classes such as commodities, including petrol.

Why oil prices are headed for a fall

Blame the weak pound...

As oil is priced in dollars, movements in the dollar exchange rate affect the price of oil in other currencies.

If the dollar gets stronger against sterling, anyone using pounds to buy petrol will have to pay more than when the dollar is weak.

When the price of oil was $147 a barrel, £1 bought you $2. Now £1 buys you $1.55. That means to buy the same oil, we need to spend 22.5% more. This difference filters down to what we are charged when filling up.

Free guides on making money from exchange rates

...And the taxman

Successive governments have been happy to apply above-inflation rises to fuel duty, with tax rises since December 2008 alone adding about 10p to the cost of a litre of fuel.

Indeed, the actual cost of petrol is less than half what you pay at the pumps: the rest is tax that goes directly to the Treasury.

According to Petrolprices.com, which helps people find the lowest-cost petrol in their area, if petrol is priced at 119.9p a litre, 57.19p is fuel tax - a mammoth 47.7%. Another 17.86p (or 14.9%) goes in VAT, and just 5p (or 4.2%) goes to the cost of delivery and a cut for the retailer. So the actual cost of the fuel is only 39.85p (33.2%).

As VAT (levied at 17.5%) is applied to the cost of petrol after fuel tax, it's effectively a tax on a tax: the taxman wins twice.

'Dark day' for motorists

The AA warned last month (March) that motorists should brace themselves for record high petrol prices this year, with the cost of unleaded fuel set to surge to £1.20 a litre (equivalent to over £5.40 a gallon) and beyond.

No sooner had it spoken than petrol hit that average all-time high, eclipsing the previous peak of 119.7p in July 2008, thanks to a fuel duty rise of 1p a litre on 1 April.

Adrian Tink, a motoring strategist at the RAC, branded it a "dark day" for motorists. "This is only the average: in some areas, motorists will be paying close to £6 a gallon (131.9p a litre)," he added.

Forecourt variations

Some garages in the UK were already demanding well over 120p a litre before the new peak was reached, while others were still charging around the 117p mark, according to Petrolprices.com.

As of 25 April, the average price for unleaded petrol was 121.1p a litre, while the cheapest was just 116.7p and the most expensive a whopping 130.9p - a 12.2% difference between the best and worst deals. For diesel, the average was 122.3p, while the cheapest was 117.9p and the dearest 134.9p - a margin of 14.4%.

Why such variation?

Some variation will be caused by the time the garage last bought a tanker of petrol and set its prices: the longer ago it made the purchase, the cheaper the fuel is likely to be.

The discrepancy can also be partly attributed to the "Asda" factor, according to experts: supermarkets sell huge amounts of petrol, so can negotiate better deals with suppliers.

Supermarket giants, such as Asda, Tesco and Sainsbury's, operate just 1,200 of the 10,000 petrol stations in the UK, but they account for an average of 12 million litres of the 14.5 million litres of petrol sold every year.

And that's not all

The cost of running a car is now more than 20% higher than it was in 2007 - driven by higher fuel costs, as well as steep hikes in insurance premiums. Indeed, the cost of motoring is up by almost 9% in the past five months alone, research by Sainsbury's Finance showed earlier this month.

It calculated that the average annual cost of motoring (including fuel, tax, insurance, MOT and servicing, but excluding any interest repayments on loans taken out to purchase a car) is now around £2,539 - up 8.6% from £2,338 late last year and 20.9% higher than in 2007.

The research found that the biggest cost increases in the past five months have been for car insurance and fuel, up by 11% and 10% respectively.

The average car owner is now spending around £1,398 a year to fill up their vehicle on Britain's forecourts, based on driving 10,000 miles a year in a Ford Focus - one of Britain's most popular cars. On average, it does 37.7 miles per gallon.

Tax, meanwhile, has gone up by 3.4% in five months and by 26% over the past two-and-a-half years. Servicing costs have risen the least, at just 1% over five months.

Will politicians help?

Only the Liberal Democrats have so far pledged to reduce fuel duty, primarily in recognition of the disproportionate costs of living in the countryside where fuel costs more and there tends to be less public transport.

The Labour party is expected to persist with its plans to increase fuel duty in October and January, by 1p and 0.76p respectively. It had intended to hit motorists with a staggering 2.76p a litre increase on 1 April, but decided to offer some respite by pushing through the increase in stages.

The RAC has joined calls for the government to hold back new fuel duty charges, saying petrol prices were well below the £1 a litre mark when the levy was announced in last year's Budget.

How much higher will petrol go?

Experts say petrol is threatening to hit new highs. Brendan McLoughlin, founder of Petrolprices.com, thinks prices could rise to as much as 150p a litre this summer, driven by the weak pound and rising oil prices.

[balli hi]

How much higher will petrol go?

Experts say petrol is threatening to hit new highs. Brendan McLoughlin, founder of Petrolprices.com, thinks prices could rise to as much as 150p a litre this summer, driven by the weak pound and rising oil prices.

As if i wasn't pi-sed off enough already