How do UK fuel prices work?

Image of a hand holding a fuel pump

We’ve all been there. You go to fill up your car, see the price at the pumps and think to yourself, ‘how much?’ Fuel pricing is a complex equation that’s made up of many moving parts, so it’s understandable if UK fuel prices are a bit of a mystery to some.

At Fuel Card Services, we’re all about transparency. As such, we’re keen to explain just what goes into setting the price for petrol and diesel in the UK. Read on to find out exactly what makes up the price you pay per litre.

What impacts UK fuel prices?

Fuel pricing in the UK is made up of three predominant factors. These are:

  • Combined wholesale cost, distribution cost and retail margin
  • Fuel duty owed to the government
  • VAT

Wholesale, distribution and retail margin is the cost of petrol or diesel to purchase by the retailer, costs involved in shipping and storage of the fuel (getting it to individual sites) and the actual margin (profit) on each litre.

UK fuel prices also track closely to the price of Brent Crude oil as traded on global markets. These markets are regulated by the Financial Conduct Authority in the UK.

According to data published by the Department for Business, Energy and Industrial Strategy (BEIS), UK fuel prices remain largely in line with an underlying trend of lower costs. As the price of oil has fallen in recent years, so too has the cost of fuel.

BEIS reported that, as of mid-August 2020, average petrol prices in the UK were 12% lower than at the same time in the previous year. Diesel prices were down by 11%. This corresponds to shifts in the price of oil.

Meanwhile, both fuel duty and VAT are relatively stable costs that go into the price of fuel in the UK. For example, fuel duty in the UK has been frozen since 2010. It currently stands at 57.95p per litre. VAT too is a fairly stable expense, standing at 20%.

Overall, the percentage of the total price we spend at the pumps is generally fixed at around 72% in duty plus VAT. The remaining 28% is made up of retailer costs plus margin. It therefore stands to reason that, while there can be some disparity in prices between retailers, a general consensus is usually achieved when we go to fill up.

Image of car keys and money on a table with a man using a calculator

The impact of oil on fuel prices

Figures from the RAC Foundation show that UK petrol prices remain lower than the ten-year rolling average. This is due to a number of underlying factors. A drastic fall in Brent crude oil prices was seen at the start of 2020. It came in the wake of oversupply by the Organization of the Petroleum Exporting Countries (Opec) and a price war between Russia and Saudi Arabia.

While this pushed down the price of crude oil per barrel, the impact of the coronavirus pandemic served to push up distribution and retail costs. As a result, petrol and diesel prices remain lower than average, but are not tracking as closely to oil markets as they used to.

Going forward, it’s yet to be determined how UK fuel prices will fare in the new normal of COVID-19. Couple this with unrest in Opec and sustained geo-political uncertainty, such as any potential change in US government policy on its own oil output, and UK fuel prices may shift considerably in the future.

Image of several barrels of crude oil lined up

So, who’s responsible for setting fuel prices?

Ultimately, there is no single body that sets the price of fuel in the UK. It’s up to individual retailers to make that decision based on the level of margin they want to receive and the other factors we’ve previously listed. Pump prices can therefore change on a daily basis.

Fluctuation in the price of oil will have an impact on the amount we all pay at the pumps, as will any changes in duty or VAT. That said, it is up to each retailer to decide if they want to pass on any cost increases or decreases to the end consumer.

How to find the cheapest fuel

So, what does this all mean for motorists? Finding the cheapest fuel should be a priority; why spend more when you don’t have to? As a result, we aim to make it easy for our customers to get the best deals.

One way to find cheaper fuel is to take out an account with Fuel Card Services. Our fuel cards can deliver up to 10p per litre off the price at the pump for cardholders. At the same time, we offer vehicle and asset tracking through our Tele-Gence service. We also provide accurate reporting of your mileage expenses – both are essential tools that can help to cut costs for fleet drivers.

Searching out the best deals is not always easy, though. Find the nearest place to fill up by registering for our Pump Locator service, available through our free Drivers Club mobile app.

You can find out more about the wide selection of fuel cards we have to offer – including all the biggest names, such as BP, Esso and Shell. Use our handy guide to compare fuel cards to determine the product that’s right for you and enjoy cheaper fuel today.