Petrol and diesel prices have an impact on family finances. Naturally, many of the UK’s 38 million motorists want to know how service stations set the price of petrol and diesel. The answer is a combination of the wholesale petrol and diesel price, the global price of crude oil, known as Brent crude, the cost of refining the crude oil into petrol and diesel, taxes which customers must pay to the UK government, the service station’s own costs and profits.
We answer some of the most frequently asked questions about fuel prices and how the cost of a litre of fuel is made up.
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1) Do pump prices in the UK track crude oil and wholesale prices?
Pump prices for petrol and diesel in the UK generally reflect trends in wholesale fuel prices. These are the prices that retailers like Shell pay to the refineries that convert crude oil into petrol and diesel.
Wholesale prices for petrol and diesel usually track trends in the global price of crude oil. However, crude oil, petrol and diesel are separately traded commodities on world markets. This means that their individual prices can be volatile, depending on the balance of supply and demand in world markets, and that they will not always follow the same trends.
Overall, crude oil and wholesale prices account for nearly one-third of the price of a litre of petrol or diesel in the UK. The rest goes towards taxes, the costs of running service stations and the profits which retailers need in order to stay in business.
2) Do fuel prices increase faster than they decrease – the so-called ‘rocket and feather effect’?
Petrol and diesel prices on Shell’s company owned UK forecourts generally track wholesale prices trends and in turn the crude oil price. Because tax makes up around two thirds of the pump price, a drop in the price of Brent Crude can only ever have a minimal impact on the price at the pump. However, occasionally there will be periods when they are not aligned - usually caused by changes in the regional levels of supply and demand for refined products.
3) How much tax do motorists pay on a litre of fuel?
The UK has some of the lowest fuel prices in Europe before tax. However, around two-thirds of the cost of a litre of fuel goes to the British government in the form of fuel duty and Value Added Tax (VAT).
Fuel duty in the UK is set at 57.95 pence per litre, regardless of petrol and diesel prices. On top of that is the addition of 20% Value Added Tax. These taxes make petrol and diesel prices in the UK among the highest in Europe. In December 2015, for example, UK motorists paid around 73% tax on a litre of fuel while the figure was 66% in France and Germany and 58% in Spain, according to figures from the UK government. Taxes on petrol and diesel are the same in the UK, in contrast to most European countries where taxes on diesel are lower. This explains why diesel is more expensive in the UK than in most of Europe
Breakdown of the cost of a litre of fuel
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4) Why are prices different from one service station to the next?
Shell owns and operates around 550 service stations in the UK, and sets the pump prices at these sites. Independent dealer groups own and operate the remaining Shell branded sites, and set their own pump prices. Shell is prevented by law from telling dealer groups what to charge their customers for fuel.
Prices can vary between service stations for a number of reasons, including the costs of transporting petrol and diesel from the refinery, with the level of competition in the local area and how many customers we hope to attract and the service station’s own running costs.
5) Why are diesel and petrol prices not the same?
Diesel and petrol are independently traded products and their relative prices reflect market supply and demand dynamics. During a year the price difference between the two products can vary significantly. Demand for petrol is highest in summer in particular in the US, where it’s known as the ‘driving season’. By contrast, demand for diesel is higher in the winter. During the summer of 2015, the price of diesel dropped dramatically due to increased amount of supply available in Europe. This increased supply was mainly due to significantly increased imports of European specification diesel from the US, Russia and the Middle East ‘super refineries'.
6) How much profit do service stations make from a litre of fuel?
The UK’s market for fuel is a highly competitive one, with low profit margins for service stations. Getting the price of our petrol and diesel right is therefore critical to Shell’s success. We are constantly balancing the wholesale prices of petrol and diesel and our own retail costs, including staff costs, rent, building maintenance and marketing, with the level of competition in the local area and how many customers we hope to attract. Fuel retailers like Shell typically make around 2%, or a few pence, profit on every litre of fuel we sell in the UK.
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