Why are UK fuel prices still so high when oil prices are falling?

British motorists could be forgiven for wondering when they will see the benefit of falling oil prices, with Brent crude dropping sharply this week while fuel prices at UK forecourts remain stubbornly high.

The international oil benchmark fell by 8.7 per cent on Wednesday, 4 November, dropping below $95 a barrel for the first time in two months. That followed the US mid-term elections, which saw Donald Trump's Republicans lose control of Congress to the Democrats, prompting financial markets to reassess the likelihood of an end to the conflict between the US, Israel and Iran.

The prospect of de-escalation in the Middle East has reduced some of the geopolitical risk premium previously built into oil prices, with traders increasingly optimistic that a diplomatic solution could ease pressure on global oil supplies.

For context, Brent crude closed at $117.64 a barrel on 30 October. By Wednesday, it had fallen to $94.62, representing a drop of almost 20 per cent in just a few days. Although prices recovered to around $99.58 on Friday morning following renewed concerns over shipping security in the Gulf, the benchmark remains significantly below its recent highs.

That same enthusiasm is yet to translate into meaningful savings for British motorists, though, as both petrol and diesel prices remain cripplingly high.

According to the latest figures from the UK Fuel Price Index published by PetrolPrices.co.uk, the average price of unleaded petrol stood at 172.78p per litre for the week ending 2 November, while diesel was averaging 198.58p.

More recent daily figures show some movement, with petrol averaging around 170.6p and diesel 198.3p on 6 November. That is a modest improvement, but hardly the sort of reduction motorists might expect when international oil prices have fallen so sharply.

Why doesn't cheaper oil mean cheaper fuel?

There are several reasons why movements in crude oil prices don't immediately translate into changes at the pumps.

Firstly, crude oil is not the same product as the petrol and diesel sold at forecourts. It has to be refined, transported, blended and distributed before reaching retailers. The wholesale prices of finished petrol and diesel are therefore influenced by factors beyond the price of Brent crude, including refining capacity, global demand, supply availability and the cost of biofuel blending, which is effectively turning pure petrol into an ethanol blend.

The exchange rate also matters. Refined fuel is traded internationally in US dollars, meaning a weaker pound can eat into any savings generated by falling oil prices.

There is also a time delay. According to the RAC, it typically takes around two weeks for changes in wholesale fuel costs to work their way through the supply chain and be reflected in forecourt prices.

That means motorists shouldn't necessarily expect to see the full benefit of this week's oil price movement immediately.

Then there is taxation. UK motorists currently pay 57.95p per litre in fuel duty, with VAT charged at 20 per cent on the final price, including fuel duty. Consequently, a substantial proportion of every litre purchased goes directly to the Treasury rather than towards the cost of the fuel itself.

However, while those factors help explain why pump prices don't move in lockstep with crude oil, they don't necessarily explain why reductions can appear to trickle down to consumers so slowly.

Rockets versus feathers

The speed at which fuel prices increase compared with how slowly they fall has been a long-running source of frustration for motorists.

FairFuelUK has now put fuel retailers on notice following Brent crude's latest decline, calling on supermarkets, oil companies and independent forecourts to pass on lower wholesale costs as quickly as market conditions allow.

Founder Howard Cox said: "Oil has crashed. So the clock starts now."

He added that motorists should expect the same urgency when international oil and wholesale prices fall as they experience when those costs rise.

FairFuelUK says it will monitor petrol and diesel prices over the next seven, 14, 21 and 28 days to establish how quickly any reductions reach forecourts.

The organisation is also renewing its calls for a PumpWatch system, which would provide greater transparency over the relationship between international oil prices, wholesale fuel costs, retailer margins and the prices motorists ultimately pay.

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