Why UK Petrol Prices Are So High: Duty, VAT, and the Supply Chain Explained

At a pump price of 138p per litre (a typical 2024 price for unleaded petrol), here's exactly where your money goes:

- Fuel duty: 52.95p per litre — a flat rate applied regardless of the pump price - VAT at 20%: applied to the full pump price (including the duty), so approximately 23p per litre - Total tax: approximately 75–76p per litre, or 55% of the total price - Pre-tax petrol cost: approximately 62p per litre (crude oil, refining, distribution, and retail margin)

This is why UK pump prices feel so detached from crude oil movements. If crude oil falls by $10 per barrel (roughly 8p per litre at the pump), the total pump price only falls by about 8p — but the tax component remains fixed. Conversely, if crude rises, the VAT element also rises (because VAT is a percentage of the total), creating a double effect.

Fuel duty was frozen at 52.95p per litre in 2011 and has remained at that level since, through various government extensions. The 5p cut introduced in March 2022 as a cost-of-living measure extended this freeze to 57.95p being the notional 'undiscounted' rate.

UK petrol doesn't come directly from oil fields. The supply chain involves multiple stages, each adding cost:

Stage 1: Crude oil production. The UK North Sea produces roughly 600,000 barrels per day, but this is far less than UK consumption of around 1.2 million barrels per day. The gap is made up by imports from Norway, the USA, Kazakhstan, and West African producers. Brent Crude — extracted from the North Sea — is the global pricing benchmark for international oil markets.

Stage 2: Tanker shipping. Crude oil travels by Very Large Crude Carrier (VLCC) to European ports. Rotterdam in the Netherlands is the main European hub, handling around 14 million barrels per day. Shipping costs vary with global trade volumes and add roughly 2–4p per litre.

Stage 3: Refining. UK refineries (Essar Stanlow, Phillips 66 Humber, and ExxonMobil Fawley are among the largest) process crude into petrol, diesel, jet fuel, and other products. Refinery margins fluctuate significantly — during the post-COVID demand spike of 2022, refinery margins globally hit record highs, adding 15–20p per litre above historical norms.

Stage 4: Distribution. Refined fuel is transported by pipeline (where infrastructure exists) and tanker to regional distribution terminals. The final-mile delivery to forecourts adds 2–4p per litre.

Stage 5: Retail. The forecourt adds their margin — typically 3–8p per litre for independents, sometimes lower for supermarkets that use fuel as a footfall driver.

There's a well-documented asymmetry in petrol pricing: prices rise faster when crude oil goes up than they fall when crude goes down. This phenomenon, sometimes called 'rockets and feathers' pricing, has been repeatedly investigated by the Competition and Markets Authority.

The CMA's 2023 review found that supermarkets had delivered better price pass-through than independents, but that the sector as a whole still exhibited significant lag in passing falling wholesale prices to consumers. The average delay from wholesale price change to pump price change was found to be several weeks — almost always in the retailer's favour.

Mechanisms that contribute to this asymmetry: - Inventory pricing: Retailers who bought stock at higher prices will sell it at those prices even after wholesale falls - Focal pricing: Competitors watch each other and are reluctant to cut first, waiting for a local leader to move - Search costs: Consumers don't compare prices on every fill (though apps like WorthThePump are changing this) - Refinery margin capture: When crude falls but refinery margins stay high, wholesale prices don't fall as fast as crude

The CMA's mandated Fuel Finder API — which requires all UK forecourts to publish real-time prices — was specifically designed to reduce search costs and encourage competition. More price-aware consumers means more competitive pricing pressure.

UK petrol prices are set in US dollars on international markets, then converted to pounds sterling. This means the GBP/USD exchange rate directly affects what UK consumers pay.

When sterling is weak against the dollar (as it has been through much of 2023–2024), the same barrel of crude oil in dollar terms becomes more expensive in pounds. A 10% sterling depreciation against the dollar adds approximately 6–8p per litre to UK pump prices, even if crude oil in dollar terms stays flat.

OPEC's production decisions are the primary driver of crude oil price movements. When OPEC Plus (which includes Russia) announces production cuts, crude prices typically rise within days. When they announce output increases, prices fall more slowly due to the rockets-and-feathers effect.

Refinery margins add another layer of complexity. During periods of high demand (post-lockdown 2021–2022, for example), global refinery capacity was insufficient to meet demand, driving refinery margins to record highs. This meant pump prices rose far above what crude movements alone would explain — and the excess margin largely remained with refiners, not consumers.