When you pay for your petrol the money is divided into two sections: money that goes towards providing the fuel itself and money that goes to the government (taxes and duties). It’s for this reason that large swings in the price per barrel of crude oil don’t translate into equivalent price changes at the pumps.
Taxes and duties
57.95 pence per litre is duty, regardless of whether it’s petrol or diesel. This price is fixed, so whether fuel is £1 or £5 per litre, it’s the same. VAT is added on at 20%, so that makes just under 70p fixed costs. VAT is also added to the cost of the fuel itself. Depending on the price of petrol, the proportion of duty has varied between 57% and 76% over the last 15 years.
Fuel producers have to extract, refine and transport fuel to fuel retailers. This is a mammoth undertaking. Fuel producers have to prospect for the oil – something that can cost over £100 million. Once they’ve found it, they have to lease the land and build the infrastructure to support its extraction. It can take 5-10 years to get to this point. All this infrastructure must be maintained – something that’s expensive if it’s a rig in the sea. The oil has to be refined into its various grades and transported to regional distribution centres. These centres have to be leased or owned. Tanker lorries arrive to take the fuel to the fuel retailer. It’s a complex process with many links in the chain.
Fuel retailers pay the fuel supplier. The fuel retailers sell the fuel and their profit on the fuel is a fraction of the actual price you pay – between 1-5%; they make their money off you purchasing other products like coffee and chocolate bars. The fuel cost averages around 30% of the actual price you pay. This is why people who drive off without paying at the pump have a disproportionate effect on the profitability of the fuel retailer – it takes a lot of litres of petrol to make up for losing £50 through someone not paying.
Electric vehicles will eventually have an effect on how tax is collected on fuel because electric vehicles can be filled from a domestic electricity supply that’s also used for boiling a kettle and lighting a room, therefore how does a country continue to raise funds for road repairs? A move towards road user charges on a per mile basis would make it a user-pays system.