Across the UK, the cost of filling up
cars has shot up recently, as wholesale oil prices rise. But when crude oil
prices went down in the past, costs at the pump did not drop back to previous levels.
This has prompted UK motoring organisation, the RAC, to complain that drivers
are being overcharged. So, what is going on?
Traditionally UK petrol prices have a
strong relationship to the price of oil, but there has always been an asymmetry
in how price changes are applied. While a rise in crude prices is passed on to
the consumer within a month, cost reductions usually take somewhat longer to
feed through to pump prices.
Although the average pump price has
slowly inched down since late November, the decrease has not been as large as
expected based upon the wholesale price. So, on this basis, it would appear
that petrol station owners are taking advantage of the consumer. But is that
the whole story?
How is the petrol price calculated?
The price that is paid for petrol at
the pump is made of a number of factors. The largest portion is fuel duty
(which is set at 57.95 pence a litre), this is followed by the cost of petrol
itself, which includes the cost of the raw element (crude oil) and its
refinement. Tax in the form of VAT (20%) is applied to petrol purchases. These
are all built in to the cost of petrol by the retailer. Profit has been
traditionally about 5% of the total price. Finally, the cost of delivery and
distribution accounts for just under 2% of the total cost.
If the cost of the petrol was the only
factor in determining its price, then pump prices would track the wholesale
price, but there is more to the business than that.
What is not included in the cost
breakdown for petrol is the cost of running a petrol station, including wages
for staff, electricity costs, rates and property costs. All of these have risen
recently. The increase in the cost of operating a petrol station has also been
exacerbated by a decrease in consumption.
Estimates show motor vehicles
travelled about 16% less than pre-pandemic levels. Miles driven went from
around 9,200 miles in 2002 to 6,800 miles in 2020.
This is supported by data from the
government’s business energy and industrial strategy, which reported that for
most of December petrol sales volumes
were running at 90% of pre-pandemic levels and - for the week ending
January 6 - were at 60%. Irrespective of the exact numbers, it is clear that
less miles and therefore less fuel is being consumed.
There are other factors. Supplying
just petrol to a motorist paying by credit card for example, can mean that the
petrol station can also lose money on the transaction due to card charges. As a
consequence, the majority of profit at a petrol station is not from the fuel
but from the attached shop where the retail operation can generate a decent
profit. The overall profitability of a retail petrol station is dependant more
on the shop than petrol. So pump prices could stay higher to make up for decreasing
income from the shop.
As a consequence, with less foot
traffic to the stores connected to petrol stations, but with certain fixed (and
possibly increasing) costs such as electricity and wages, petrol retailers may
have been forced to adjust pricing to ensure an overall profit.
A future for petrol stations?
So the apparent decoupling of the
wholesale and pump prices may signal an end to the pricing peculiarities that
evolved in the UK due to price competition - going forward price changes may be
more affected by profit margins. Whether this is just a kneejerk reaction or whether
it’s going to be the new norm, only time will tell.
Nevertheless, these issues around
profitability for petrol stations will be further tested with the ever-increasing
percentage of electric vehicles (EVs) on UK roads. After all, if you 'fill up' with electricity at home or work why do you need to stop at a small speciality
store for supplies. You may just as well stop at a traditional grocery store or
a smaller supermarket that will have a wider range of produce.
Those drivers not using EVs over the
next few years are going to find changes in the cost of petrol since they will
have to shoulder an increasing burden of the current business model for old-style
petrol stations.
Andrew Barron
Chair of Low Carbon Energy
and Environment, Swansea University
This article was originally published
on The Conversation and it is reproduced here under Creative Commons licence.