Before I wrote my book, I sat on the fence when discussions turned to fuel prices. That is, I didn’t have an opinion about the way the cost of petrol (and diesel) follows or doesn’t follow oil prices.
When I recognised that there was to be a political element to The Volatile Fickle Unpredictable Undependable Price of Oil, I realised that I had to climb down from my neutrality and work out whether petrol prices could be lower.
To answer this challenge I worked out a method of comparing oil and petrol prices over time. As people rightly point out, we can’t expect the cost of a litre of petrol to follow exactly the cost of a barrel of oil, because of Fuel Duty and VAT. So I developed a formula that let me separate the cost of the oil from the other costs of a litre of fuel. To get the price we could have been paying, I reduced the cost of the oil (in proportion to the oil price drop since June 2014) and added back in the other costs.
as I copied the formula into this post I had a sudden feeling it was wrong. After all, I have applied VAT to fuel duty, and surely the government would not do such a thing? Well, it turns out they do.
I set the fixed costs at:
- Fuel duty – 58p a litre
- Retailers’ markup – 6.43p (remember, the retailer has to find all their costs out of this)
In the price of oil I included:
- Exploration, transport, production and refining costs as well as tax and profit
And I checked the rate of VAT:
- Charged at 20% of the total of the other costs
Churning the price of oil and the price of petrol through this equation gave me the potential price of petrol for each of the months in this chart.
A few months on from publishing the oil price has skipped about a bit, and I thought it was time to update the chart.
This calculation is a bit simple. For example, I didn’t allow for changes in the cost of refining and transporting oil/ petrol. (My rationale is that I don’t know whether fixed costs outweigh the cost of energy in those activities.) Nor does it take the GDP/USD exchange rate fluctuations into account, at least one government committee has decided this has an influence.
But it serves a purpose, and that purpose is to show that it is not fuel duty and VAT alone that have stopped petrol prices falling in line with oil prices. We could have been paying less for our petrol, on average just over 10 pence a litre less.
The good news is that we all benefit from paying this extra money, as it increases the VAT taken by the HMRC. And that is our money, spent wisely by the government on our behalf.
Cost of UK petrol
Cost of Brent crude
Breakdown of costs
VAT is applied to fuel duty
GDP/ USD exchange rates explain the lack of fall in petrol prices