Why is petrol still so expensive? Rishi Sunak’s cut tax but fuel prices keep rising

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On March 23 Chancellor Rishi Sunak proclaimed the “biggest cut to all fuel duty rates – ever” as he sliced 5p per litre from the tax in an effort to combat rising costs – but that reduction hasn’t been reflected in pump prices.

In March alone the average cost of a litre of unleaded as measured by the Government’s own data broke the £1.50 barrier for the first time. It rose to £1.60 just one week later and peaked at £1.65 just before Sunak’s Spring Statement.

In contrast it took a decade for the price to rise from £1.40 – first breached in April 2012 – to £1.50 per litre. Since 20% VAT is added after fuel duty, that 5p tax cut should actually amount to 6p less cost per litre, but that’s not what we’ve seen at the pumps.

At the time of writing the average was 161.67p per litre, down only 3.7p on its March high of 165.37p.

Even before the Chancellor’s announcement, the Petrol Retailers Association (PRA), who represent about 65% of UK filling stations, warned that a tax cut would not be felt immediately because duty is charged at a wholesale level.

Filling up petrol motorcycles on a forecourt

The petrol in each station’s underground tanks has already been taxed, so sellers don’t see the price cut until fuel stations pay for their next resupply. And they say rising wholesale costs have eroded some of the saving.

What does it all mean?

So has there been any real world reduction as a result of the tax cut? And what is it doing to the bike industry as a whole?

Tony Campbell, CEO of the Motorcycle Industry Association said: “It has been difficult to determine if this reduction has been fully passed on. As we all experience a regular change to the price at the pump, any benefit has now been completely eroded.

“We expect prices to remain high and as such we believe it will influence our sector both positively and negatively.”

It’s not all bad news

“If you ride purely for leisure you may choose to do this less frequently or travel fewer miles. That said, as a motorcyclist, it will be one of the last things I will stop doing,” Campbell continued.

“If you travel to and from work by car, we believe more people will turn to small capacity or fully electric motorcycles and scooters as a cost-effective alternative.

“The market year to date is showing growth (plus 40%) across all sectors with electric leading the way, up by 85% compared to the same period last year.”   

The MCIA’s findings are backed up by MCN’s reader research. A snap poll run on our website over the last week found that 61% of riders have not (so far) let rising costs prevent them from getting out.

 

The retail cost of petrol closely mirrors the price of crude oil, which has hit record highs in recent months exacerbated by the Ukraine war that has resulted in wild fluctuations in oil prices

That high price means that despite the fuel duty cut there’s actually still more tax going into Government coffers now than there was before the price surge.

In May 2020, when unleaded was at its cheapest in recent years, at 104.87p per litre, duty and VAT added up to around 75p per litre. Now, despite the 5p duty cut, the higher cost means more VAT so in total there’s about 80p per litre going to the Government.

UK fuel price graph

What’s next for petrol prices?

Crude oil prices define the cost of petrol, and while there’s little prospect of substantial reductions in the near future they currently appear to be at a peak – albeit in a very uncertain market. Crude oil is currently around $108 per barrel.

The US Energy Information Administration, which monitors international prices of Brent Crude, expects the price will average $108 per barrel in the second quarter of 2022 and then drop to $102 per barrel in the second half of the year.

The administration said: “We expect the average price to fall to $93 in 2023. However, this price forecast is highly uncertain. Actual price outcomes will depend on the degree to which existing sanctions imposed on Russia, any potential future sanctions, and independent corporate actions affect Russia’s oil production or the sale of Russia’s oil in the global market.”

While positive news on fuel is thin on the ground, data shows that petrol stock at filling stations, which dropped enough before Easter to see some local shortages, are bouncing back to normal levels.

Ben Purvis

By Ben Purvis