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Why are petrol prices so high?

Petrol prices are at a record high right now, and with oil prices still on the up and another fuel duty increase planned for April, things look set to get worse. Here we use graphs and pictures to help explain what the hell is going on.

by Victoria Bischoff on Feb 17, 2011 at 12:00

Petrol prices are at a record high

Fuel prices are the highest they have ever been – with new records being set almost every day.

At the end of January the average UK price of unleaded petrol rose to an all time high of 128.62p a litre, while the price of diesel hit a record 133.26p a litre.

And prices still appear to be rising. On Tuesday this week prices rose again to 128.81p and 134.01p a litre respectively, according to Petrolprices.com.

Prices are rising in Europe too

And it’s not just petrol prices in the UK that are on the up; this is a trend across the whole of Europe.

Along with the UK, Cyprus, France, Romania, Slovakia and Spain are among the worst hit by rising petrol prices - bad news for people planning to holiday in Europe this year.

Oil prices are rising

So why are petrol prices rising? One of the reasons is increasing oil prices. When the price of oil increases so does the wholesale price of fuel - the price retailers pay for fuel before tax is added on. Retailers then pass on their increased costs to customers in the form of higher pump prices

The price of Brent crude oil has risen steadily since August when it was around $70 a barrel, passing the $100 a barrel mark earlier this month for the first time since October 2008.

This rise is thanks in large part to an increase in demand since activity plummeted during the recession and recent unrest in the Middle East. Violent protests in Egypt saw the price of oil shoot over $103 a barrel earlier this month, an $8 dollar increase since the Middle East crisis hit Egypt on 25 January. Concerns over Israel-Iran tension meanwhile caused the price of oil to rise above $104 a barrel mark last night.

Oil isn't high as it was

It is worth noting that the price of oil is nowhere near as high now as it was when petrol prices last peaked at around the 120p a litre mark in 2008 - shortly before the economy collapsed.

In July 2008 the cost of crude oil reached $147 a barrel, so at around $100 a barrel now we are still a long way off.

Stronger sterling

What’s more, news that sterling has strengthened significantly against the dollar in recent weeks should also have been good news for people buying at the pumps.

Oil is traded in dollars so a stronger pound means importers pay less in sterling per barrel and therefore should be able to pass on savings.

At the time of writing sterling is trading at $1.609 against the dollar, having risen from $1.54 in late December.

Tax hikes

So if the price of oil isn’t as high as 2008 and the pound is stronger, why are pump prices higher than they have ever been? The answer is tax. As you can see above, tax – fuel duty and VAT – makes up the majority of the petrol price.

The government hiked fuel duty three times last year, increasing the tax by 3p to 58.95p per litre of petrol. VAT meanwhile also increased in January from 17.5% to 20% - hiking the price of petrol by another 3p a litre. There is also another 1p fuel duty increase planned for April this year.

So will petrol prices continue going up?

With oil prices still increasing and another tax rise on the horizon, it is likely that petrol prices will remain high in the long run.

According to AA, if the 1p fuel duty increase goes ahead as planned in April pump prices could rise by as much as 4p. This is because fuel duty will increase in line with inflation and VAT will be added on top. There is talk of scrapping the planned fuel duty increase in the next budget, but this has yet to be decided.

Edmund King, president of the AA, said: ‘With fuel duty going up by inflation and inflation driven up by higher fuel prices, this vicious circle is revenue-raising gone mad.’

Fuel stabliser

With petrol prices incredibly volatile right now, the government is being put under increasing pressure to introduce a fuel stabiliser. The AA thinks that the government will be forced to announce at least a consultation on one in the next budget, but doubts if one will actually be introduced.

If there is a major shift in the price of oil, having a fuel stabiliser in place would help reduce the impact of shocks. For example, if the price of oil increases, the government will reduce fuel duty to keep the price of petrol at the pumps steady. On the other hand if oil prices drop suddenly the government will increase fuel duty.

We need greater transparency

Finally, as we discovered when trying to put together this data, it is abundantly clear that we need greater transparency in this market.

A spokesperson for the AA said: ‘In other parts of the world, such as the US, Australia and South East Asia, wholesale prices are published freely but here we have to find out deviously’.

What’s more, unlike the energy market which is overseen by Ofgem or water by Ofwat, there is no fuel regulator or industry watchdog - not even to monitor prices.

Perhaps now would be a good time to introduce one.

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