Pump my ride! Why petrol prices are sky high again

Hi there wannabe money savers! Whilst in my car this morning, the radio blurted out that the UK has emerged from 18 months’ of recession. This filled me with some optimism, despite the tenuous 0.1% growth figures on which the recovery claim hung.

However, when I pulled into the petrol station it struck me that even though the country’s economy is growing again, my car, and specifically the petrol it drinks, will be contracting my own personal wealth for the foreseeable future.

The reason for this is petrol price rises. From summer 2008 (when the price per litre peaked in the £1.20s) until January 2009 (when the price dipped as low as 86p) we enjoyed a sustained drop in the cost of petrol and diesel. But the past year has seen prices creep back up to today’s average petrol price of £1.12. The bad news is – the cost could well rise for the rest of 2010.

Reasons for the High Cost of Petrol

1) Tax

The main culprit is tax, which accounts for around 65% of the total fuel charge. Tax is levied in two ways: fuel duty and VAT. Fuel duty currently adds 56.19ppl (pence per litre) to the cost of petrol and diesel, with VAT adding 17.5%.

Since December 2008, duty has gone up by nearly 6p from 50.35ppl, and is due to rise again on 1 April 2010 by 1% above inflation (around 1ppl). The government says it charges such high duty to generate revenue and to discourage the use of cars (it claims the latest duty increase will save two million tonnes of CO2 (MtCO2) per year by 2013-14).

However, the Petrol Retailers Association (PRA) believes that several more fuel price rises are on the cards before 2010 is through.

A further penny may be added from 1 April, when the government withdraws its duty incentive to refiners who produce biofuel. The PRA expects this duty increase to be passed on to us at the pumps.

Post election, the PRA also expects that any government new will look to raise taxes to replenish national coffers – with whispers of 20% VAT being one very unwelcome rumour. Such a measure would hit motorists to the tune of an additional 2.5ppl.

It gets worse! A snap budget could be called after an election, possibly resulting in a further 2ppl hike in duty. And all of the above is without taking into account the possibility of increases in the world price of oil, which could bring about forecourt prices of 125ppl by Christmas. Yikes! Remind me not to read any more PRA press releases

2) Oil Company Profits

Another culprit for the high cost of petrol is the oil company. Even though their take is only about 28 % of the forecourt price, they still make £billions in annual profits, so there is leeway to lower prices.

But come on, can you really see some exec standing up at the next board meeting to champion a profit-slashing price cut for the benefit of customers? If this happened, companies like Shell wouldn’t be able to post profits of $31bn (as they did in 2008, largely on the back of record oil prices).

Oil companies lower their prices when global oil prices dip. However, there has been criticism in the past that oil companies are quick to pass on increases to customers, but less speedy when it comes to passing on price reductions.

3) Oil Trader

This petrol price manipulation trick hit the news in November 2009 when Devon residents, peering out of their windows across the English Channel, noticed a fleet of parked supertankers spoiling their view. It was soon claimed that greedy traders and speculators, far more slick than the black cargos which they now owned, were waiting for petrol pump prices to rise before offloading the oil.

Hang on! Moneymen doing unethical things that negatively impact us in the pocket? I’ve never heard such nonsense! Please ignore point 3 as a possible reason for our current high fuel prices, and proceed instead to…

…Tips on reducing driving costs

As frustrating as high forecourt prices are, there are ways to cut driving costs. For example, you can try car sharing to work, walking to the nearest shop instead of driving, getting on your bike, or trading your existing car in for a less thirsty model (check out these Confused.com articles on green cars and small cars and the best cars for your pocket.
Also, supermarkets seem to have regular price wars with rivals where they tempt customers by offering cheap petrol – so keep a look out for those, plus petrol fund initiatives are popping up online like Free Petrol Club.

In summing up, unless there’s a nice big drop in global oil prices, it’s likely that petrol and diesel will rise during 2010, so be prepared. That said, there are ways you can cut costs, so make sure you check out those links.

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