personal finance

Oil prices to plunge again – two reasons why motorists will hardly see a penny of it


Wholesale oil prices are not the only factor that determines what you pay on the forecourt. The petrol prices also reflects retailer margins and fuel duty. Up to three quarters of each litre you buy goes straight to HM Treasury. The more the oil price falls, the higher the percentage tax you pay.

Motorists will be seething at last week’s news that profiteering petrol retailers are failing to pass on a 5p-a-litre cut in duty, implemented in March 2022.

The average price of petrol fell by 7.5p a litre in November to 146.95p, according to the RAC Fuel Watch. However, that is 10p more than we should be paying, adding £5.50 to the cost of filling up a 55-litre tank.

Diesel fell almost 7p to 154.40p but that is still 5p a litre too high, as retailers fail to pass on lower wholesale costs.

The long-term average retailer margin is 7p for petrol and 8p for diesel. Today, they’re making margins of 17p and 13p respectively.

RAC fuel spokesman Simon Williams said drivers are “continuing to get a rough deal at the pumps” given that wholesale fuel costs have been falling for months. “Motorists should be paying around 137p for petrol, instead of a whopping 147p.”

Paul Burgess, chief executive at Startline Motor Finance, said sky-high petrol prices are worsening the cost-of-living crisis. “While petrol and diesel costs are below the peaks seen a little over a year ago, they remain historically high and just filling up a car at the pumps is clearly a financial strain for many.”

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It does’t help that car servicing and maintenance costs have been accelerating at the same time, Burgess added.

The oil price raced past $122 for a barrel of Brent crude in June 2022, as Russian leader Vladimir Putin‘s brutal invasion of Ukraine triggered an energy shock.

After gradually sliding it jumped again at the start of the Israel-Hamas conflict, peaking at $95 in late September. It has since fallen to around $75 as fears of a wider regional war in the Middle East ease.

The second reason that petrol and diesel prices do not reflect the drop is that they include fuel duty charged at a flat rate of 52.95p per litre, regardless of the wholesale price.

Incredibly, VAT at 20 percent is charged on both the pre-tax petrol price and fuel duty, too.

As fuel prices fall, drivers actually pay a higher percentage tax charge, due to that flat fee. When a motorist pays 120p a litre at the pumps, 65 percent of the cost is tax. If the forecourt price falls to £1, the tax take jumps to 75 percent.

Fuel duty fills up Treasury coffers to the tune of more than £26billion a year. Together with VAT charged on fuel, vehicle tax and showroom tax, motorists contribute more than £40billion annually.

This poses a problem for the Treasury, as the government is also looking to ban sales of new petrol and diesel cars as part of its net zero climate change commitments.

The deadline has been postponed from 2030 to 2035, but as sales of fossil fuel motors fall, the Treasury will have to replace all those lost revenues.

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One suggestion has been to introduce a pence-per-mile road tax for electric vehicles, but Burgess said this is likely to be just as unpopular as fuel duty. “Our research shows that more than half of motorists are against a new proposal to make electric vehicle drivers pay 6p per mile to counter a tax shortfall.”

Electric vehicle owners want pricing to be kept low, to drive the switch to less polluting cars, but the Treasury may have different thoughts.

There is some good news in the pipeline as the oil price could slide further next year.

Norbert Rücker, head of economics and next generation research at Julius Baer, said the energy market is well supplied despite recent Saudi Arabian attempt to cut production. “Storage is within seasonal limits and global demand is stagnating.”

Yet given rip-off retailer margins and tax charges, prices won’t fall anywhere near as much as they should.

With so many things getting more expensive at the moment, it’s a shame that motorists won’t benefit much when something actually does get cheaper.



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