Drivers deprived of 97p-a-litre petrol

Nearly six weeks after supermarkets first introduced petrol at a special offer price of £1 a litre the UK average price has yet to fall to that level.

By The Newsroom
Saturday, 23rd January 2016, 8:00 am

The UK average would be close to 97p a litre, with some supermarkets offering petrol at 94p, had refiners and petrol commodity market players not deprived drivers of the 5p-a-litre saving from cheaper oil, the latest AA Fuel Price Report highlights.

Over the past week, petrol prices have started to fall again after a lull through Christmas into the second week of January. However, drivers have been growing increasingly angry after the price of oil fell almost £10 a barrel, from above £37 during the festive period to below £28 this week, but with little change at the pump. Between Christmas and January 12, the average price of petrol stuck at around 102.8p a litre.

This week, the UK’s average price of petrol price had fallen to 102.23p a litre, down from 104.37p in mid December. The forecourt price of diesel now averages 102.56p across the UK compared to 107.72p a month ago.

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The primary causes of the pump price deadlock were:

- The value of petrol in commodity markets, when compared to the price of oil, rising 30% and negating much of the benefit of cheaper oil,

- The pound weakening against the dollar (oil and commodity market petrol are valued in dollars), equivalent to a penny on the pump price of petrol,

- The cost of ethanol rising from below $450 a cubic metre this time last year to around $600 now, equivalent to 0.75p on the pump price of petrol.

Through much of January last year, petrol coming out of refineries averaged around £470 a tonne with oil averaging £47 a barrel. Last week, petrol in commodity markets averaged £388 a tonne with oil averaging £29.5. Simply put, commodity petrol was 10 times the value of oil in January 2015 but is 13 times the value now.

If petrol in commodity markets was still 10 times the value of oil, even with the pound at its current value of £1.43, the wholesale cost of petrol would be 15.57p a litre. Adding 1.15p for the ethanol content in petrol, 57.95p in fuel duty, the usual 6.5p remainder covering retailer and supplier margins, transport, admin, etc, and then VAT, the cost of petrol in the UK would be between 97p and 98p a litre – or 4p to 5p a litre lower than now. With Asda selling its petrol at 3p below the UK average through most of last year, petrol would be available in many UK towns and cities for perhaps as little as 94p litre.

Instead, because commodity petrol is 13 times the value of oil, the current wholesale price of petrol is around 21p a litre. Adding tax and the other ingredients, the average UK price of petrol should be around the 103p to 104p a litre mark.

Tuesday’s pump prices by retailer brand show that averages on non-supermarket forecourts have yet to fall below £1 a litre. They also show that non-supermarket forecourt prices are largely at or below the expected level.

AA research finds that during the periods of early 2014, early 2015 and late 2015*, subtracting the cost of wholesale, ethanol and tax from the pump price leaves a fairly consistent 8p a litre. This covers retailer and supplier margins, transport and other costs (incl VAT). That gap has now closed by around a penny a litre, pointing to lower margins in the retail sector.

At wholesale level, the cost of diesel has been around 2.5p a litre cheaper than petrol. However, the 5.2p fall in the pump price of diesel over the past month, compared to the 2.1p fall in the pump price of petrol in the same period, indicates some correction in the diesel-petrol price gap at the pump. With more diesel price variety between forecourts, compared to the often tight price-matching around petrol prices, the AA considers that diesel drivers are in a better position to shop around and find retailers selling diesel at a lower price. It is therefore more relaxed with the diesel-to-petrol price gap – unless that gap grows to an indefensible 4p - 6p a litre, as happened with the Great British Diesel Price Rip-off last year.

As well as being victims of the 5p-a-litre commodity market mark-up, small market towns with populations of around 10,000 across are missing out on £1 a litre fuel because they don’t have supermarket forecourts nearby. That is adding another 3p, 4p or more to a litre of petrol. The fuel price search on the AA App reveals that it is a problem across the UK, with examples including: Jedburgh 103.9p in southern Scotland, Ludlow 103.9p in Shropshire, and Haslemere 103.9p in southern England.

On average, petrol is cheapest in Yorkshire and Humberside and East Anglia at a cost of 101.9p a litre, and most expensive in the North West, Scotland and the West Midlands at 102.6p. The average cost of diesel is as low as 101.6p a litre in Northern Ireland but dearest in Scotland and the North at 103.1p. Northern Ireland and the West Midlands also stand out as having diesel costing less than petrol on average – an indication of where diesel prices are likely to go compared to the price of petrol.

“UK drivers have been deprived of petrol costing just 97p a litre. Our members have watched in dismay and complained bitterly as the price of oil has crashed but pump prices have moved very little since Christmas. We now know that savings equivalent to £2.50 a tank are being diluted as petrol commodity prices buck the trend of falling stock market prices and fail to fall in line with oil,” says Edmund King, the AA’s president.

“It has to be realised that supermarket petrol at below £1 a litre in the run-up to Christmas was essentially a special offer: brilliant news for the majority of motorists because it affected virtually all major towns and cities. The key question then was whether other retailers would follow or wait to see if the special offer ended after the New Year.

“Crashing oil prices slowly filtering through to wholesale allowed supermarkets to maintain the £1 a litre on petrol beyond Christmas, and then extend the same price to diesel in the new year. We think that other retailers waited to see if the move was just a festive flash in the pan and, once it was clear it wasn’t, started to cut their margins to close the price gap. Now that wholesale prices have started to trickle down again, the UK average for petrol has started to move closer to the £1 a litre.

“Unfortunately, road fuel at the price of bottled water is some way off because commodity market players and refiners have been soaking themselves in the 30% higher return from converting oil to petrol. This sort of behaviour would be flagged up in the United States and Australia because fuel price transparency is officially sanctioned and reported. In the UK and Europe, pumped-up commodity prices for petrol were highlighted by the AA and motoring organisations in May 2011. Nothing was done by the UK government or the EU – and now it has happened again.”