The Oil Drum: Europe | UK Petrol Prices

UK Petrol Prices

Posted by Chris Vernon on May 3, 2006 - 5:02pm in The Oil Drum: Europe

As fuel prices rise everyone seems to be talking about the price we pay at the pump. However it also seems that many people don't really understand how that price comes about. Hopefully this short piece will help.

There are three main components to the price at the pump:

Price of the product
Excise duty
Value Added Tax (VAT)

The price per litre at the pump is simply:

Price of the product + Excise duty + VAT

We'll work backwards from the recent record price of 96.13p per litre of petrol reported Thursday, 27 April 2006 (BBC News). The average price of April was a little lower at 94.6p, significantly up on March's price of 90.0p (link).

First the VAT at 17.5%, which on 96.13p is 14.32p (96.13-96.13/1.175).

Second the duty. This is a little more complicated, the BBC article above states petrol has 47.1p duty on a litre. This came into force on the 1st Oct 2003 (link).

From 21st Sept 2004 this was meant to increase to 49.02p (link) but I don't believe this ever happened.

The 2005 budget said that from 1st Sept 2005 the duty would increase by 1.22p (+2.59%) to 48.32p in line with inflation (link) . This never happened.

The 2006 budget said that from 1st Sept 2006 the duty will increase by 1.25p (+2.65%) to 48.35p in line with inflation (link). This hasn't happened yet so we are still paying the 1st Oct 2003 duty of 47.1p on a litre.

This 31 month freeze in duty could be interpreted as a cut of 2.0p that was due against inflation (4.3% inflation 31 months Aug03-Mar05 (link).

So going back to our litre of petrol at 96.13p we have 14.32p of VAT and 47.1p of excise duty leaving 34.71p per litre for the actual product. In percentage terms that is 14.9% VAT, 49.0% excise duty and 36.1% product.

So 63.9% (61.43p) of the sticker price on that record Thursday went to the government.

The 34.71p for the product has to cover the crude oil itself (discovery, extraction etc), the refining, the additives, the transportation, the marketing, the forecourt etc...

Just for ease of comparison, based on the exchange rate on Thursday, 27 April 2006 of $1.80 to the pound and 0.2642 US gallons to the litre:
The total price of 96.13p/litre = $6.55 per US gallon
The product price of 34.71p/litre = $2.36 per US gallon

Response to product price change

It's interesting to see what happens when the price of the product changes.

If the product were to increase in price by 20% from 34.73p to 41.68p what would happen?

The sticker price would become 41.68p + 47.1 + 17.5% = 104.32p. An increase of only 8.5% and the rate of tax would fall from 63.9% to 60.0% (62.34p), albeit increasing by 0.91p per litre.

Similarly if the product were to decrease in price by 20% from 34.73p to 27.78p what would happen?

The sticker price would become 27.78p + 47.1 + 17.5% = 87.99p. A decrease of only 8.5% and the rate of tax would increase from 63.9% to 68.4% (60.20p), albeit falling by 1.23p per litre.

A feature of a high fixed taxation, the excise duty, is this damping effect of product price variations on the sticker price. In countries with little or no element of fixed duty such variation in the product price would have a much greater affect at the pump.

We should also revisit the impact of the frozen level of duty against inflation for the last 31 months. The government should increase duty by 2.0p to 49.1p to correct for inflation. However the duty isn't the only tax. The price of petrol in Oct 2003 was 81.3p (link) of which 12.11p was VAT, 2.21p less than the VAT on our 96.13p litre. The increasing product price has enabled the VAT proportion of the tax to compensate for frozen duty. It should also be said that correcting that 12.11p VAT for inflation would add another 0.5p of which only 0.21p is left over after covering inflation on the duty so it could be said government is taking 0.3p per litre less now than in Oct03.

Prices around Europe

This map from the International Fuel Prices 2005 report shows the price of petrol and diesel across Europe in 2004.

Click to enlarge.

It should be noted that whilst the UK is amongst the most expensive with only Iceland, Netherlands and Norway featuring a higher price, the following major countries are within 7% of the UK price: Finland, Italy, Sweden, Denmark, Belgium and Germany.

UK Petrol Prices

PDF version

11 comments

Elizaphanian on May 3, 2006 - 10:57pm Permalink | Comments top

Thanks for this. I've been thinking for a while that the high fixed level of duty is a major benefit (short term) for the UK, not simply in dampening the price swings, but also, conceivably, giving the government room to manouevre if a recession takes hold (ie reducing duty to stimulate the economy).

I'd be interested to know what the pump price would likely be if the crude price hits, say, $200 per barrel. My guess is about £1.60 or so - which would force many economies, but I can't see as being utterly devastating (unlike the effect that price would be in the US).

Which means that the UK will be able to afford to import oil - for as long as there is oil available to import, which may not be for that much longer, if Westexas is right.

Chris Vernon on May 4, 2006 - 3:54am Permalink | Parent | Comments top

I'd be interested to know what the pump price would likely be if the crude price hits, say, $200 per barrel.

We can make a guess.

In Oct03 the average price of oil was $30.35 (link), £18.17 (1Oct03 exchange rate) in the pounds of the day which lead to a product price of 22.09p (based on 81.3p sticker price).

In Apr06 the price of oil was $70.16, £40.32 (1APR06 exchange rate) which lead to a product price of 33.41p (based on 94.6p sticker price).

From that, ignoring the lag effect, we can say that $200, £108.70 (today's exchange rate) oil might produce a product price of 61.39p which would lead to a sticker price at the pump of 127.48p.

The tax take would also have risen by 4.90p per litre so maybe duty could actually be reduced by almost that amount taking the sticker price down to 122.58p whilst maintaining the same tax take per litre.

Anyway, using 127.48p/litre at $200 might only increase petrol prices by 35% from their Apr06 levels. Based on this and the low price elasticity I don't think petrol price will directly be the thing that reduces driving in the UK. The same calculation in the US would more than double the price at the pump.

Someone check my numbers?

haggisbasher on May 4, 2006 - 5:12am Permalink | Parent | Comments top

Hi Chris,

I get more or less the same numbers using the same relationship in product price rise v oil price rise as occurred between Oct 03 and April 06.
However there is a disproportionality between the oil price rise and the product price rise. Between 03 and 06 the oil price increased by a factor of 2.31, but the product price increased only by a factor of 1.51. I would assume that is due to the other costs of refining and delivery only rising by the normal amount of inflation. As the oil price continues to increase by a greater amount than the other costs, it will have a more direct effect on the price of the delivered product.
In the worst case, if the product price maintained the same relationship to oil price when the oil price reaches $200 as in Apr 06, product price would reach 95.24p, and pump price 167.25.

biffvernon on May 4, 2006 - 7:32am Permalink | Parent | Comments top

Within the product price there are other taxes. Royalty was abolished in 2003 but Petroleum Revenue Tax is still levied on the, albeit declining, share of older North Sea fields, Corporation Tax is applied to oil company profits wherever they get their oil and the companies also pay National Insurance on domestic wages and Business Rates on domestic premises, and other taxes are levied by the various producer nation governments. All of these must ultimately be covered by the product price.

It's interesting, perhaps sobering, to see so clearly spelled out, Chris, that when the price of crude doubles I won't actually need to alter my driving habits very much. The price of domestic heating and electricity is, I suppose, much more sensitive.

max the gasman on May 9, 2006 - 3:45pm Permalink | Parent | Comments top

"It's interesting, perhaps sobering, to see so clearly spelled out, Chris, that when the price of crude doubles I won't actually need to alter my driving habits very much. The price of domestic heating and electricity is, I suppose, much more sensitive. "

The cost of fuel before tax includes many oil and energy intensive processes i.e. transport costs, and all the infrastructure of oil production from bit to car fuel tank, plus making the cars, and maintaining roads. These costs of motoring will all rise too. These cost rises will curtail car use. The rising cost of steel has yet to feed into retail car prices, but it must do soon.

Farming and fishing have no fuel tax either.

Nick Rouse on May 4, 2006 - 7:20am Permalink | Comments top

I have always wondered why the excise is higher on diesel in the UK. A higher price for diesel is shared in europe only by Switzerland and Liechtenstein. Was it once that only industry used diesel engined transport and the voting public used petrol and it was politically easier to tax industry?

In trying to reduce carbon dioxide emissions and hydrocarbon consumption it seems perverse to have a higher tax on the more efficient fuel.

Whatever the original reason it should be changed now. TOD readers would probably wish to see this done by raising the price of petrol but we are in a small minority and I suspect the best we can hope for politically is a tax neutral adjustment of both prices.

This differential is probably the reason Mercedes Benz decided not to produced a right hand drive two seat diesel Smart car at 88mpg which would be zero tax disk and only the petrol version at 66mpg and £25/year tax disk

Tom DC in VA on May 4, 2006 - 5:53pm Permalink | Parent | Comments top

The excise tax difference is not that great, but you are right, it should be lower. However, it should not be so much lower that it encourages people to purchase a higher-powered diesel than they would otherwise.

Fergie on May 4, 2006 - 8:43am Permalink | Comments top

This is my first post here although I have followed P.O. news for about five years.

I have made some startling observations over the last few months that tends to contradict the usual impression that high petrol prices will force more people to use public transport. I would suggest that high petrol prices will do the exact opposite, in fact this is already happening where I live (Central Scotland where petrol has already passed £1 litre).

On the route I use to go to work (luckily only twice a week, I work from home the rest of the time) the bus companies have scrapped saver fares, day returns etc. They have also moved from a coach to a 24 seater to a 16 seater for the same journey, thus increasing the chance of being left behind. When I quizzed them about these changes I was told that they had to make savings because of the high fuel costs. The cost for myself has gone up from £4.75 (October 2005) to £13.10 (yesterday).

When we moved house we chose this location because it had a good bus service - not any more.

The upshot of all this is that fare paying passengers are abandoning the buses almost totally as it costs less than £5 in petrol for the same journey by car (and it is much more comfortable than a cramped mini-bus). This just leaves pensioners and schoolkids who travel free anyway. At least 10 people that I know have decided to start driving to town again after years of using public transport. I have heard that fares are due to go up again this month. Although I am in my 40's and have never driven I am now taking lessons as I fear that it will become essential soon.

I honestly think that if fares keep increasing as they are then the public transport system will collapse as it is always going to be much more expensive than using a car (without serious Govt. subsidies - and we all know that 'the market' doesn't like subsidies).

If I had been asked a year ago whether I would want to own a car I would have categorically answered NO, but now it seems I have little choice.

MUDLOGGER on May 4, 2006 - 10:16am Permalink | Parent | Comments top

The law of unintended consequences strikes again.
This is why I think the problem is too big for the market to handle on its own. The next step will be cutting bus routes out completely. This will sting in rural scotland, especially north of the central belt and in the southern uplands.

Another example of the law of unintended consequences was the raise in car tax for gas guzzlers: If you drive an SUV in London, it is equivalent to 4 lattes a month.
If you need a 4x4 on a hill farm, you need to produce another 4 sheep to cover the increased cost.

We are going to need considerably more joined up government than we have at present if PO is to be managed at all.

PaulusP on May 4, 2006 - 9:58am Permalink | Comments top

Chris,

Hope you don't mind this off-topic info (Shell had a campaign 2 years ago showing why we pay such a premium for gasoline here in Holland); today in my local newspaper a small corner that the drilling of the Bacton-Balgzand (Gas)Pipeline under the dunes has been delayed, again, due to "technical difficulties" until June.

doctorbob on May 4, 2006 - 4:26pm Permalink | Comments top

"I have always wondered why the excise is higher on diesel in the UK."

My recollection from many years ago is a comment made (I believe) someone in the UK motor industry when it was suggested that diesel duty be cut in the UK. The comment was something like "that would be a good way to sink the British car industry" - presumably because British-made diesel cars at that time were rough, slow and noisy compared to continental and Japanese offerings. I'm not sure what the excuse is now, since the UK-owned car industry has disappeared!
Diesel cars are invariably more economical that equivalent petrol versions,smooth and often as fast - look up specs of Audi and BMW models. There is a health shadow over emissions of particulates. Maybe also, the government doesn't want to reduce duty - and hence revenue - on diesel and is too frightened to increase duty on petrol to compensate.