Why is petrol more expensive now than it was 15 years ago?

A post from Twitter, versions of which have been widely shared on Facebook, claims that while the cost of petrol in the UK is much higher now than in 2008, the price of oil is actually lower, suggesting that retail fuel prices don’t mirror crude oil prices. 

The tweet was first shared by iScot Magazine on 9 March. The version shared on Facebook reads: “Petrol was 104p per litre in the UK in 2008 with oil being $140 a barrel.

“Yesterday we paid 170p per litre and oil is currently $110 a barrel.”

The oil prices in the claim are correct as of July 2008 and early March 2022. The current petrol price figure in the claim is broadly accurate too, but the figure given for 2008 is far below the price of petrol when oil reached $140 a barrel.

Nevertheless, it’s correct to say that petrol at that point in 2008 was cheaper in pounds than it is now, in spite of oil being more expensive.

Taxes and exchange rates have changed since 2008, which explain some of the price differences. Once you factor those out, road fuel prices paid by motorists move with the wholesale oil price, but the gap between crude oil prices and pre-tax fuel prices is larger now than it was back in 2008.

Why your fuel costs what it does

The price drivers pay for fuel comprises the wholesale cost of fuel products, fuel delivery, retailer margins and government taxes. 

At time of writing, UK unleaded petrol prices are around £1.65 per litre on average (ranging between £1.20 and £1.90), and diesel is £1.77 (ranging between £1.51 and £2.08). 

For unleaded petrol at £1.65 per litre, according to estimates from car services company the RAC, 51p of that is the wholesale cost of petrol paid by retailers and 11p is the cost of ethanol that is mixed with the petrol in E10 fuel, the standard petrol grade in Great Britain. 

Two pence is delivery and oil company costs and the retailer margin is 16p. 

Finally there are taxes. Fuel duty adds nearly 58p and VAT at 20% adds on another 28p. 

Diesel follows a similar pattern, except with higher wholesale diesel and ethanol costs and VAT, and a lower retailer margin.

International oil prices rose following the Russian invasion of Ukraine, but are falling again

The price of a type of oil called Brent crude oil (in US dollars) is considered a benchmark for the price of oil internationally. At the start of March 2022, the oil price passed $110 a barrel, which was reported at the time, and this could well be the source of the oil price figure used in these claims.

It increased further still in the following days, passing $130 dollars a barrel on 8 March. Since then it has dropped back to around $100 dollars a barrel, which has been linked to hopes of a ceasefire in Ukraine and expectations of a fall in demand from China, which is seeing more Covid cases emerging. The price remains volatile.

Oil prices rose to around $140 a barrel back in the summer of 2008, which was also reported on at the time and linked to a weak US dollar and supply issues from oil producing countries. Again this could be the source of the figure used in the claims. 

Petrol and diesel pump prices rose in the UK back then too, to record average prices at the time of £1.19 for unleaded and £1.33 for diesel.

So the post’s claim that petrol was £1.04 per litre when oil prices were over $140 per barrel is incorrect. Official statistics show a litre of premium unleaded petrol was £1.04 at the beginning of 2008, when crude oil was less than $100 a barrel, but not in summer 2008 when crude oil prices were much higher. 

However the point still holds: oil was more expensive then but pump prices were less than they are now.

There are a few reasons for this. Firstly, exchange rates between the pound and dollar are different. In mid-2008 the dollar was relatively weak, and worth about 50p. It’s now worth closer to 76p. What that means in practical terms is that oil, which is traded in dollars internationally, is relatively more expensive for companies in the UK to purchase than it was in 2008.

Secondly, direct taxes on road fuel are higher now. In 2008 fuel duty added 50.35p on the cost of a litre of fuel, and VAT was 17.5%. Fuel duty is now 57.95p and VAT is 20%.

The question is whether there is a third significant factor: are retailers keeping the price high to increase their margins, at the expense of consumers?

There can be a lag in passing on savings from retailers to motorists

Comparing data on the price of oil paid by UK refineries and the prices of petrol and diesel before taxes are applied, there is a correlation, although oil prices are a lot more volatile.

That said, the difference between the two prices has grown since 2008. In other words, rising crude oil prices have not translated into similarly large increases in pre-tax fuel costs. On the other hand, falling crude oil prices have not translated into similarly large decreases in pre-tax fuel costs.

This could be due to a number of factors: refineries which buy crude oil set the prices retailers pay for petrol and diesel, and retailers set the prices that consumers pay at the pump, with taxes added on. That means the cost of refining and transporting fuel, competition, and the profit margins of the companies will all impact the prices.

The RAC, which campaigns for motorists to get “a fair price” at the pump, has called on retailers to lower their prices to reflect the recent drop in oil prices. 

On the wider question of passing on savings, it says: “Before 2020, the RAC believed retailers had a reasonable record of passing on reductions in the wholesale price of fuel to motorists at the pump, but there were occasions where we thought this could be carried out more quickly. 

“For instance, retailers often seem to take more encouraging to reduce their prices when oil prices are falling than they do when oil goes the other way.”

The term for this often used in the industry is the “rocket and feather” effect (prices rise like a rocket in response to oil price increases, but fall like a feather when oil gets cheaper).

We know that pump prices of petrol and diesel have been rising significantly in response to rising oil prices. It remains to be seen how quickly and significantly consumer prices will fall in response to more recent falling oil prices.

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