Who gets what in Britain’s big £100 fuel filler

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It’s easy to blame petrol station owners for the rising cost of fuel, but they’re not the source of woe for British motorists facing soaring prices. They are just human faces confronting an anger that should be directed elsewhere.

The cost of filling a 15 US gallon (55 litre) tank of fuel on a standard family saloon has exceeded £100 ($120), putting more and more strain on the budget of people who are still hesitant to use public transport for fear of catching Covid and, more immediately, in the face of a week of strikes that threaten to cripple much of the country’s rail network.

In absolute terms, petrol prices at the pump have risen by more than 40 pence per litre, or around $1.85 per US gallon, since the start of the year. On June 15, the national average price was £1.87 per liter ($8.61 per US gallon) and many factors drove it up.

Rising crude prices are a major contributor to higher costs at the pump. Crude was already strengthening as global demand recovered from the pandemic at a faster rate than supply. Oil producer group OPEC+, which cut output by more than 10 million barrels per day (about 10% of total global production) in April 2020, has struggled to keep pace with its own plans for the gradually recover. They have fallen further behind their collective production target in recent months as more members reach capacity limits that have fallen due to lack of investment over the past two years. It then received further impetus after Russia invaded Ukraine in late February and European buyers responded by avoiding Russian barrels.

Expressed as a percentage, the increase in crude oil prices was much greater than that of prices at the pump. Crude is up more than 60% since the start of the year, against a rise of around 30% in the price of gasoline at the pump.

The government tax cut had very little impact on prices. A fuel tax reduction of 5 pence per liter (equivalent to around 26 cents per US gallon at the time) was quickly offset by the higher cost of Value Added Tax (VAT). Fuel tax is charged at a flat rate – currently 52.95 pence per liter ($2.44 per US gallon) – while VAT is levied at 20% of the final price (including fuel tax) .

As gasoline prices have continued to rise since the duty reduction, the VAT payable has increased with them, more than offsetting the reduction. Whereas the government received around 83 pence per liter from petrol sales via fuel tax and VAT at the start of March, it now receives 84 pence, according to figures from motoring organization RAC.

No wonder gas retailers and consumer groups are calling for another, bigger cut in fuel taxes. But while he would be welcomed by motorists, he is unlikely to help for long. The problem, as I have argued here, is that lowering prices stimulates demand and, in a market that is globally short of supply, this is just going to drive prices up even more.

Commodities (crude oil and biofuels) and taxes together account for 84% of UK pump prices for petrol and a similar proportion for diesel. That leaves about 30 pence per liter (or $1.37 per US gallon) to cover the cost of turning crude into fuel, shipping it, storing it and selling it. Most of this is absorbed by fuel production at refineries, with the difference between crude prices and wholesale petrol prices being nearly 22 pence per liter (or $1.01 per US gallon) , leaving only 8 pence per liter (36 cents per US gallon) for delivery, distribution and retailers.

Refining costs have gone up along with everything else. Rising natural gas prices, which soared over the winter and remain high amid disruptions to Russian exports following its invasion of Ukraine, have increased the cost of removing sulfur from fuels, necessary to meet environmental fuel standards.

Even so, oil companies are under pressure from governments on both sides of the Atlantic and this will only intensify as they begin reporting quarterly profits that will be boosted by soaring prices, as those same increases prices fuel inflation.

In the UK, petrol prices are high due to the large tax levy, but rising because crude prices are soaring. With limited spare capacity globally, both to produce and to refine oil, the only way to bring prices down is to limit demand to meet available supply. While cutting taxes is popular, it won’t solve the underlying problem that demand needs to come down – not just in the UK, but everywhere.

More from this writer and others on Bloomberg Opinion:

How Russian is it? : A Very Rude Question: Julian Lee

The United States is depleting its strategic oil reserve faster than it seems: Javier Blas

We will need sanctions and endurance to defeat Putin: Clara Ferreira Marques

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Julian Lee is oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Center for Global Energy Studies.

More stories like this are available at bloomberg.com/opinion


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