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Thursday, 7 September, 2000, 11:27 GMT 12:27 UK
Q&A: Petrol price rises

With petrol prices soaring and protesters blocking access to oil depots, BBC News Online explains why fuel has become so costly.

Why are petrol prices going up now?

The price of crude oil, the raw material from which petrol is made, has escalated in recent weeks, pushing up the price of fuel.

There is a lag before a change in the price of crude affects prices at the petrol pumps because orders are placed in advance, based on the prices at the time and expectations of future trends.

As the price of oil has now been high for some weeks, with no immediate prospect of coming down, the inevitable feed through to pump prices has begun to take effect.

What is causing oil prices to be so high?

Like any other market price, the cost of oil is determined by demand and supply.

Some weeks ago, Opec (the Organisation of Petroleum Exporting Countries) trimmed supply to lift the oil price towards its target of about $25 a barrel.

But world prices started to rise beyond $30 a barrel and pressure was brought to bear on Opec to raise production.

An increase of 500,000 barrels a day was agreed if oil prices stayed high, amid much dispute within Opec, but this failed to calm the markets.

There is now pessimism over the prospect of any significant increase in production being ratified, and this has caused the oil price to hit a 10-year high of $35.

Are there any other reasons why petrol prices are so high?

Oh yes: tax. The crude oil price might be the cause of current short-term fluctuations in petrol prices but, particularly in the UK, the main reason why fuel is so costly is the level of duty levied by the Government.

Labour has been very committed to reducing pollution and greenhouse gas emissions. It wants to provide a cost incentive to cut traffic and increase the use of public transport.

After a series of above-inflation increases inroduced by the Conservatives and continued after Labour came to power, fuel duty and VAT now comprise more than 75% of the pump price of petrol and diesel.

In the UK, about 64 pence per litre of unleaded petrol is tax, whereas in the US 8.5p per litre is tax and in France 51p is tax.

The extra revenue earned has gone some way towards funding the Government's extra public spending in areas like health and education.

But some Opec members have suggested that countries complaining about the high costs of fuel should look more to their own tax policies than Opec's production levels.

Will prices keep going up?

It is likely that the current escalation of oil prices will settle down soon.

There is a long history of crude prices going up and down in accordance with the strength of the world economy and the balance of power between leading consumers, such as the US, and Opec.

But pollution and traffic congestion issues will not go away so governments can be expected to maintain tax policies designed to limit the use of polluting fuels.

All in all, we can expect petrol prices to rise sharply, then settle down again, with retailers competing fiercely for customers possibly even trimming prices back a few pence per litre.

But it is very unlikely we will see petrol much cheaper than it is now, and in the longer term we can expect prices to continue to be pushed up by further tax increases.

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See also:

07 Sep 00 | Business
Petrol prices set to rise
07 Sep 00 | Europe
French fuel dispute escalates
31 Aug 00 | Business
Oil markets explained
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