Britain’s motorists should brace for higher petrol prices

LONDON: British motorists should brace themselves for more expensive petrol and diesel as the price of fuel is hit by a double shock from rising oil prices and a weakening exchange rate.
The initial impact of the Brexit vote on the cost of filling up was masked by the sharp drop in oil prices, priced in dollars, between the middle of June and the middle of September.
Brent crude prices declined by almost 10 percent between the outcome of the referendum on June 23 and Sept. 19.
The lower price of oil helped cushion the impact of a weaker currency, which declined by around 12.5 percent over the same period.
Forecourt prices for both petrol and diesel rose by less than 1 percent between the outcome of the referendum and Sept. 19 as the two effects canceled each other out.
Steady pump prices led some commentators to dismiss the impact of a weaker exchange rate on the cost of imported food, fuel and other items.
But now sterling is declining even further, and instead of offsetting the impact, oil prices are rising strongly, which makes it almost inevitable that pump prices will rise in the days and weeks ahead.
The relationship between international oil prices and pump prices is complicated because of the impact of refinery and retail margins and but most of all because of the effect of taxes.
Britain levies some of the highest fuel taxes in the world to raise revenue, encourage vehicle efficiency and meet climate change commitments (“Fuel taxes by country,” Alternative Fuels Data Center, September 2016).
The government imposes a flat-rate excise duty of 57.95 pence per liter on both petrol and diesel sales and then a 20 percent value-added tax on the whole sale price (including the duty element).
The interaction of fuel duty and value-added tax creates a minimum sales price of nearly 70 pence per liter for petrol and diesel even if the price of crude oil were to fall to zero.
The large fixed tax element ensures pump prices do not change by as much in percentage terms as the price of crude or the exchange rate.
So the correct comparison is between pump prices excluding duty (and VAT on the duty) on the one hand and the price of Brent and the dollar exchange rate on the other.
Brent prices have risen by almost 16 percent over the last three weeks. Sterling has fallen by almost 6 percent over the same period.
So far, the pump price of both petrol and diesel excluding fixed-price tax elements has increased by just 2.5 percent over the same period.
Fuel refiners and retailers may accept some degree of margin compression to protect volumes and non-fuel sales (most fuel retailers also sell groceries and other items on which they make higher margins).
But the scale of the movement in oil prices and the exchange rate is such that fuel refiners and retailers are unlikely to absorb it all.
Unless oil prices fall, or sterling recovers, Britain’s motorists face a significant increase in pump prices over the next few weeks.
The price of fuel, currently around 112 pence per liter for petrol and 114 pence per liter for diesel, is likely to rise closer to 120 pence per liter for both fuels.
Fuel prices would be at their highest level since December 2014, though still below their recent peak of 130 pence per liter before oil prices began to slide in July 2014.
Britain’s Petrol Retailers Association has warned pump prices will move “sharply upward” unless recent currency and oil price moves are reversed.
“Platts wholesale costs to retailers have increased by over 6 pence per liter for petrol and 7 pence for diesel in the last few weeks, whereas the UK average pump prices have moved up by less than 2 pence,” the PRA warned on Monday.
“Thus motorists can expect increases of up to 4 or 5 pence per liter by the end of the month unless there are favorable corrections to the exchange rate and to global oil prices.”
The PRA is lobbying the government to cut fuel duty in the forthcoming autumn statement by 3 pence per liter to offset the impact of higher oil prices and currency weakness.

— John Kemp is a Reuters market analyst. The views expressed are his own.