Why the price of fuel can't fall as fast as the oil price

In December, the news that petrol was going to dip below £1/litre was received with festive cheer by motorists. And yesterday crude oil fell under $35 a barrel so many people will assume further pump price cuts are on their way.

However, the likelihood of further falls in pump prices are small because, as we pointed out with this infographic before Christmas, the tax component for a litre is almost 75 per cent of the price and is the main reason it is so expensive, not the price of oil.

Tax per litre of fuel

And the regressive nature of fuel duty has a more punitive effect on those with low incomes and those who rely on their cars more than others, particularly rural residents.

In recent times, fuel duty has been lower, in 2003 it was just 45.82 pence (and VAT was lower) but what was the tax percentage?


In the past 12 years the tax component of petrol has never been below 55 per cent (left axis) - a massive burden for drivers. The design of fuel duty is such that the lower the underlying fuel price, the greater the percentage of the total cost is tax. We are in a perverse situation where the cheaper a product becomes, the greater the proportion of tax.

The problem lies in the fact that the duty is levied at a flat rate of 57.95 pence per litre, irrespective of the fuel price. Then VAT is charged on the total cost of the fuel and the duty.

Even if the petrol were free you would still have to pay 69.54 pence for each litre (fuel duty plus VAT). Under the current tax regime it cannot go lower than this.

So in spite of oil falling by over $100 a barrel, it is almost impossible for there to be proportionate reductions in the pump price.