Tuesday, 21 June 2011

UK petrol prices - broken down

Petrol prices in Britain remain at near record levels and it's certainly true that the instabilities of the middle-east have led to higher oil prices recently.  Media outlets are quick to point to the rising price of a barrel of oil but this doesn't tell the whole story.

While the oil companies do take a hefty slice of the price we pay at the pumps, the British government takes even more.

As at 21st June 2011, the average price of a litre of petrol is around £1.33.  That breaks down into three areas (all prices are approximations).

  • 53p per litre:  Petrochemical companies - the price charged by the oil companies, known as untaxed pump price.  This includes all overheads, transportation, research and development costs and, of course, their profit).
  • 58p per litre:  UK fuel duty.  This is a fixed price, regardless of what happens to the oil company prices.
  • 22p per litre:  UK VAT (Value Added Tax) currently stands at 20%, applied to the total of oil company price + fuel duty  (i.e. tax on top of tax).

60% the money we pay today for a litre of petrol goes to the government.  Or, to put it another way: we're currently paying the same price in tax (80p) as it cost for a litre of fuel (including the fuel company's costs) just 6 years ago.

It wasn't always this way:   In 1993 the UK fuel prices were considered amongst the lower prices in Europe.  In the same year, the Conservatives introduced a UK fuel duty 'escalator', originally intended to stem the increase in pollution and to cut the need for new road building.  However, a (highly welcomed) side effect was the significant increases in revenue to the Treasury.

The idea was to increase the petrol prices some 3-5% ahead of inflation thus steadily increasing the proportion of money paid to the government in taxes.  The escalator officially finished in 2000 but these above inflation price increases have continued to this day;  for example, between now and 2013, duty is expected to increase by 1p per litre over inflation each year (currently 4.5%).

So what's the answer in the medium term?   What about long term power implications for when the fossil fuels run out?

More on that to follow

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