Fuel prices aren't currently at their highest point in recent years but they're still high, and they seem to be climbing back up. So, just how do prices compare to those we paid a few years ago? Why are prices so high? What determines how much we pay when we fill up our tanks?
Prices now and then
The following figures refer to the average pump prices of unleaded petrol including VAT but the trend for diesel runs closely parallel. Average prices are given in pence per litre.
Ten years ago, in October 2013, a litre of unleaded petrol cost 132.16p including VAT at the pump. From October 2013, prices fell consistently until they reached a low of 101.27p in February 2016, at which point they began to rise again. Despite that upturn, the overall trend in prices from October 2013 was downward until May/June 2020, when the profound impact of the Covid-19 pandemic was becoming evident.
Fuel prices began to climb steeply from that point, reaching a high of 191.43p in July 2022. For a while it looked as if prices were falling as steeply as they had shot up but, in June 2023, with unleaded petrol at 143.20p per litre, prices began to increase once more.
At the time of writing, in December 2023, a litre of E10 unleaded petrol costs 146.69p, but prices look set to rise again due to risks posed by conflict in the Middle East. Oil and Shipping companies have had to pause traffic through the Bab-el-Mandeb strait, which connects the Red Sea and the Gulf of Aden. The strait runs past Yemen and there have been many attacks on ships in the area by Yemen's Houthi rebels since the renewal of military hostilities between Israel and Palestine. Delays and diversions are expected to add considerable time and expense to the transportation of oil.
The following graph shows what we've paid at the pump over the last 10 years.
What makes fuel so expensive?
Nothing's ever as simple as it looks. There are always invisible costs to be paid before we finally see the retail price of anything, and fuel is no exception - whether it's petrol or one of the alternative fuel sources we may eventually turn to when we have to abandon petroleum.
Let's look briefly at the supply chain stages that contribute to the eventual pump prices.
Extraction and the wholesale price from the supplier
It costs money to extract crude oil from under the ground and it costs money to transport it. After these and other expenses are recouped, the producer can set its profit margin. That profit margin may be set by individual companies or, in some cases, by an organisation such as OPEC. More about them later.
Refining
Refineries typically buy crude oil from producers. Once again, the process incurs costs (the producer's profit margin, energy costs, transportation etc) which the refining company must cover before adding their own profit margin.
Terminal stage
Terminals are usually where additives and ethanol are added to the refined product. Once again, the terminals' functions cost to implement and those costs have to be covered before the owner makes a profit. Terminals may be owned by an oil company, a consortium of oil companies or an independent company that charges for its handling and processing services.
Point of sale/pump
This is where we will see the final price but there are still elements to be built into that price. Obviously there are transportation and other costs incurred in getting petrol to the filling stations. Then there is the government's sizeable cut of the pie. Fuel duty and VAT account for most of the price that we eventually pay. In other words, we pay more in taxation by whatever name than we do for the actual product.
UK fuel duty currently accounts for 34% of the pump price of unleaded petrol. VAT currently accounts for 17% of the pump price. In total, tax levied by the UK government makes up 51% of the price we pay.
Stable price elements vs volatile ones
The taxation on fuel may seem shocking but at least it is reasonably stable. The other elements are far more volatile and subject to rapid and unpredictable changes.
The price of crude oil, for example, may be affected by factors such as conflict and political upheaval which may impact production and transportation. It is also subject to the whim of the producer. In the case of oil from one of the member states of OPEC, that can be difficult to predict.
Other factors
OPEC
OPEC, the Organization of the Petroleum Exporting Countries, is a kind of cartel of countries that produce oil. Its members are mostly countries located in Africa and West Asia. OPEC is supposed to enable member states to work together to maximise their collective profits without bleeding dry those countries who buy from them.
The nature of a price-fixing cartel tends to be to set prices as high as it can get away with. In this respect, OPEC doesn't work reliably, as individual member states sometimes decide it is in their short-term best interests to produce and sell as much oil as they can. That undermines the supply-limiting ability of the group as a whole.
OPEC doesn't control the world's whole oil supply. The USA, Russia, Canada, the UK and many others are also producers. The USA is the world's largest producer, at a staggering 12,800,000 barrels a day.
The bottom Line
Whether we power our cars with petroleum or electricity, the factors that will dictate how much we pay are many and largely unpredictable. We may track trends, we may understand how supply chains work but there are always those unexpected spanners waiting to be thrown into the works. In recent times we have seen all clearly how conflict can suddenly turn expectation on its head.
It sometimes seems that the only real constant is the feeling that prices always rise faster and more often than they fall.
See our fuel saving tips here!
