Page last updated at 16:42 GMT, Thursday, 8 April 2010 17:42 UK

Why has petrol gone up more than oil?

By Damian Kahya
Business reporter, BBC News

Stanlow oil refinery
One reason is that oil refiners cut supply during the recession

The cost of filling up a tank with unleaded petrol has hit a new record. Yet the price of its raw ingredient - crude oil - is nowhere near its highs of the summer 2008. Why?

The price we pay reflects the cost of turning it into petrol, the profits for the refiners and retailers and, of course, tax for the exchequer. Whilst crude oil is still over a third cheaper than it was in 2008 - almost everything else has changed.

A WEAK POUND

One of the biggest impacts comes from the falling value of the pound which has dropped by almost 25% against the dollar since the heady days of 2008.

"The currency certainly has significant impact on the price," explains Simon Thorne from oil and energy analysts Platts.

The problem is that oil is sold in dollars, so every time the pound weakens, buying it becomes more expensive.

Using approximate figures provided by the AA and industry analysts Experian Catalist, it is possible to calculate that if the pound were still at 2008 levels petrol would be 10 pence a litre cheaper.

HIGHER TAXES

But the falling pound is only part of this story. Even taking into account the weaker sterling, crude oil is still over 20% cheaper for us to buy than it was at its peak in July 2008.

Breakdown of the cost of one litre of petrol

Tax has gone up though, and at least 65% of the cost of petrol comes from tax.

According to the latest figures from the Department of Energy and Climate Change, UK drivers pay more in taxes on petrol than almost all their European counterparts - ranking 25th out of 27.

And since July 2008, fuel duty has increased by just under 7p. When you add in VAT, it comes to a total 8.2p rise in the cost of fuel.

Then there has been the removal of some subsidies for bio-fuels, which make up around 3.5% of most petrol on the forecourt. Some analysts say this could add about a penny to the cost.

MAKING A PROFIT

Over the last 12 months the difference between the wholesale price of petrol and the price of oil - what industry insiders call "the crack" - has increased.

That is to say that the price of petrol sold to forecourts - before tax and irrespective of what happens to the currency - has gone up by more than the cost of oil.

Part of this is seasonal. Summer fuel and winter fuel are actually different, and that drives up the cost of petrol at this time of year as refiners switch to the more expensive summer variety.

But refiners are also trying to get back to making a profit on petrol.

Petrol prices since the start of 2007

"There was a period in late 2008 when refiners were losing money for every barrel of gasoline [petrol] they produced", says Jonathan Leitch a senior analyst at energy consultancy Wood Mackenzie.

The so-called crack was zero - despite the effort involved in turning oil into petrol, they sold the petrol for the same price as the oil they bought to make it.

Refiners had been making their money instead on high diesel prices. But since the recession, the demand for diesel has dropped. Diesel is the primary fuel for road haulage, and as fewer goods are being bought, so there is less need to transport them.

Refiners responded to the recession by cutting production. According to Platts at least four out of the UK's nine refineries are now up for sale.

But just as supply has been cut, demand for petrol has at least partly recovered - sending prices and profits up.

The wholesale price of petrol is now 12% more than the cost of oil - compared to 0% in 2008. If refiners were still refining petrol for nothing it would be at least 5p a litre cheaper.

"I think the refiners are in a difficult position," says Luke Bosdet from the AA. "In their need to get their profit up to a sustainable level they might have gone too far."

The AA's latest survey shows almost half its members are considering cutting back on car use due to high prices - that would impact refiners further.

WHAT NEXT?

Further tax rises are planned, adding another two pence to the cost of fuel by January next year. Meanwhile the cost of refining is unlikely to fall.

"One of the things that is going to happen to refiners in future is that they will have to pay more for the cost of the carbon dioxide they produce," says Jonathan Leitch from Wood Mackenzie.

Simon Thorne at Platts predicts that in future most of our refined petrol may come from modern, efficient, Asian facilities.

"The best thing we can do right now is buy the cheapest price - it is just that that is rarely going to be Britain."



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SEE ALSO
Price of petrol hits record high
08 Apr 10 |  Business
Motorists hit by fuel duty rise
01 Apr 10 |  Business
Chancellor delays fuel duty rise
24 Mar 10 |  Business
Petrol prices are 'slow to fall'
19 Feb 10 |  Business
Oil price up as Opec holds quota
17 Mar 10 |  Business

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