What affects the price of fuel?

With ongoing cost of living crisis, all eyes are on the government as to how it can ease the situation, with road fuel prices remaining high. The cost of fuel has come down slightly following the massive surge seen in 2022, which saw petrol prices increase by more than 18p per litre in a single month that summer, the largest monthly rise on record.

It still remains high, however, with the monthly averages for petrol and diesel in January 2023 being 148.45p per lite and 171.27p per litre respectively.

There are many factors that impact how much you pay at the pumps. VAT, fuel duty, and wholesale costs are among the most commonly known items on your fuel bill. This article will break down these costs to display just how much of your money is being taken and in whose pockets it ends up.

Who’s responsible for setting fuel prices?

There is no government regulation on the amount a private company can charge per litre of fuel. 

Rightly, or wrongly, it has been left up to the markets to decide the price that the customer will pay. Set your prices too high and the customer will drive past your refuelling station to make a saving at another destination.

Conversely, as we have seen in the news recently, if you advertise too low a price it will attract too many customers and cause gridlock.

What is fuel duty?

Fuel duty is quite simply a tax added to each litre of fuel sold in the UK. The government is estimated to bring in £26.2 billion in 2022-2023 through the sale of road fuel. 

The amount we pay for fuel is subject to two separate taxes - fuel duty and VAT (value added tax). 

The cost of each litre of fuel can be broken up into three segments:

• Fuel duty
• Wholesale cost (the price the retailers pay)
• Retailers' costs and profit margin 

The current rate of fuel duty as of February 2023

Petrol, diesel, biodiesel and bioethanol fuels each attract a duty of 52.95p per litre.

How do fuel prices work

Wondering why is petrol so expensive in the UK? Fuel prices are set by the forecourt owners. Service stations have come under intense public scrutiny, with fuel prices hitting record highs in recent months. Most of this public anger has been directed at the wrong people. 

Yes, fuel stations have been charging record-high prices, but that doesn't mean they are the ones making the record profits. The fuel retailers are operating on very thin margins, with increased costs in staffing and delivery eating into the profits. 

If we follow the money, we can see clearly it is the oil and energy producers who are the ones raking in the all-time high profits. 

Recently oil giants Shell and BP both recorded record profits in 2022, at £32 billion and £23 billion. These announcements caused uproar in the face of financial austerity and growing concerns over the financial impact of the energy industry.

Factors affecting petrol and diesel prices

Fuel duty and VAT aside, there are a few other important factors which can have a significant impact on the prices we pay at the pump:

• The global price of crude oil 
• Supply and demand of crude oil
• Refinery production and capacity
• The pound-to-dollar exchange rate (refined fuel is sold in US dollars)
• Crude oil and refined fuel distribution costs
• The margin fuel retailers decide to take

The latest fuel prices

Use the interactive graphs below to track the latest prices (courtesy of RAC):

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How much tax do we pay on petrol?

After each of the costs mentioned above is added together, it gives the price before VAT. VAT is then charged at 20 per cent of the total amount, including fuel duty.

That's right, the government are charging you fuel duty and then taxing you for that too.

For instance, if you spend 148.704p on a litre of petrol – roughly the average pump price in February 2023 – you would only actually receive 59.88p of fuel (50.64p for the wholesale petrol plus 9.24p for the bioethanol content that’s standard in E10 fuel). The cost of delivery and handling is minimal at 1.7p a litre, while even the retailer’s margin is pretty small at 9.39p (according to figures from the RAC).

So the total cost of that litre of fuel before any form of taxation works out at 70.97p. On top of this, the standard fuel duty of 52.95p brings the price before VAT to 123.92p. And then the whole lot is taxed at 20 per cent, taking the grand total to 148.704 – more than half of which goes to the government in one form or another.

When does fuel duty go down

Fuel duty only changes when the government announces it will. The most recent change in fuel duty was a 5p per litre reduction in the spring budget this year, announced by former chancellor Rishi Sunak. The government has also frozen it for 2022 and 2023, estimating a £5 billion saving over the next 12 months (or £100 for the average car driver). 

How to find the cheapest fuel

There are many apps and websites available that use your current location and map out where the nearest deals are to you. We use Confused.com’s interactive fuel prices tool.

It’s super easy to use, and it even shows how much you’d be saving on average if you pick the cheapest petrol station near you.

If you’re driving an EV, you should check out our article and find some of the best apps for electric car owners currently available! If you’re driving an EV and not really worried about the cost of diesel and petrol, you should browse the latest best EV home energy tariffs, and see if you can save! 

Are electric cars affected by fuel duty?

Currently, there are no plans to introduce fuel duty on electric vehicle charging, although there have been suggestions and consultations on how to future-proof fuel duty revenue as we make the shift towards a greener economy. 

If you are an EV owner and charge from home the government will receive 5% VAT on that transaction, as this is the tax rate applied to your household energy bill. 

If you are an EV owner who charges using a public charger then you will be taxed at 20% VAT.

This is one of the reasons we are seeing record high prices to charge outside of the home. 

How could the UK government introduce fuel duty on electric cars?

Smart meters are evolving and in the future, I foresee all new installations of smart meters to track EV charging on a separate meter, which could then have an increased VAT, or fuel duty, electricity tariff applied to it. This would prevent households from being charged extra on top of their normal energy usage. 

The government could opt to scrap fuel duty and replace it with a pence-per-mile driven charge. 

This model is currently used in other countries and is a way to directly tax the vehicles that use the roads the most, which is considered to be a fairer method of taxation. This could be easily tracked through the annual MOT of vehicles which is recorded on the government database.

Taxation on the energy used to power vehicles – be that electricity or liquid fuel – is a separate topic to Vehicle Excise Duty (VED). However, it’s worth noting that the government is planning to introduce VED for electric vehicles in 2025, bringing them in-line with the standard rate paid on petrol and diesel cars from their second year onwards.

While this isn’t directly linked to energy costs, it shows that the government is scaling back the incentives historically attached to EVs and begs the question of whether electricity itself could be next.

Want to subscribe to a car? Find out more about the average monthly car subscription cost with our in-depth analysis.