Why are UK fuel prices at a record high when cost of oil has fallen?

As fuel price protests block motorways in England and Wales, petrol prices have again hit a record high. That is despite a slight easing in sky-high wholesale costs for retailers, which had been blamed for the pain at the pumps.

The average cost of petrol hit a record 191.53p a litre on Sunday, while diesel is 199.03p and, in some places, above £2 a litre. Fuel prices have risen this year as the cost of crude oil, used to produce petrol and diesel, has jumped.

The price of crude collapsed during the pandemic as travel restrictions punctured demand. That demand has since largely returned. Russia’s invasion of Ukraine has exacerbated the situation as various western countries shun Russian oil. A fall in the value of the pound against the dollar has also pushed up wholesale costs for petrol and diesel retailers.

The price of oil has eased from the highs of about $140 (£115) a barrel at the beginning of the invasion to about $110 as countries have sought supplies from alternatives to Russia. Typically wholesale and retail prices move in tandem but refineries appear to be taking a bigger cut.

Refining margins are calculated using “crack spreads” – the overall price difference between a barrel of crude and the petroleum products refined from it. These spreads have hit record highs in recent months after a reduction in refining capacity in Europe and the east coast of the US.

In Britain, there are just six big oil refineries. In theory, the boom in refining demand should have helped them, although the oil price spike in March will have inflated their input costs.

The wholesale cost of petrol has fallen for five straight weeks. The RAC has accused retailers of not passing this on. It said the average cost of delivered unleaded was 145.7p a litre last week which, after adding 7p a litre margin for the average retailer, and 20% VAT, produces a price of 183p. RAC fuel spokesperson, Simon Williams, said: “Despite this, the big four supermarkets, which dominate fuel sales, are standing firm with a litre of petrol at their stores costing an average of 190.19p.”

Retailers have argued that oil refineries have not passed on a fall in the price of crude oil since the highs during the early days of the war in Ukraine. They also point out there is a lag between the wholesale cost that a delivery of fuel is bought at and the price at the pump, depending on the retailers’ contract with their fuel supplier.

The government has accused some fuel retailers of profiteering and not passing on March’s 5p cut in fuel duty. The Competition and Markets Authority (CMA) has been tasked with conducting a “short and focused” investigation into pricing in the sector that is due to conclude on Thursday.

The government has said it has seen evidence that forecourts within the same retail chain are offering different prices in different areas of the country – this could be down to franchising agreements in the sector. There have also been claims that supermarkets are not competing as hard on fuel prices as in previous years.

If the CMA finds evidence of collusion on fuel pricing, it could move to a deeper investigation into the industry. The sector has faced calls for greater transparency on how the final pump price is arrived up.

Meanwhile, the government is under pressure to reduce VAT or introduce a further cut in fuel duty. The chancellor, Rishi Sunak, has promised to consider the matter.

Yes. In Germany, fuel duty was cut by 25p a litre, while drivers in the Netherlands, Ireland and Spain received a 17p reduction, and France a 14p cut. UK fuel duty is 52.95p a litre for petrol and diesel.

It is unlikely there will be a significant drop despite the rate of price growth slowing over the last week. JP Morgan has warned oil prices could surge 240% to $380 a barrel if Russia slashes production in response to western plans to cap energy prices. The bank said Russia could cut its oil production by as much as 5m barrels a day without causing excessive damage to its economy. That production cut would squeeze markets and push up prices. For drivers, that could spell further woes in the wallet.

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