Get ready for higher petrol prices

Motorists need to be ready for big increases in the cost of petrol and diesel -- a gallon of unleaded petrol already costs £5!

It's not been a happy New Year so far for British motorists, with severe winter weather creating treacherous driving conditions throughout the country. What's more, there are more chills to come for motorists, thanks to ongoing increases when you fill your fuel tank...

Higher prices at the pumps

The first blow is that, after a temporary cut in Value Added Tax to 15% from 1 December 2008, VAT returned to 17.5% on 1 January 2010. The end of the VAT reduction has added 2.3p a litre to fuel prices. Also, increases in fuel duty last April and September added 4.5p a litre to fuel prices in 2009.

Thus, according to the AA, the average pump price for petrol is now over 110p a litre, with diesel costing 111.8p. With 4.54 litres to the gallon, this means that a gallon of petrol has hit £5, with diesel even more expensive at £5.08 per gallon.

More bad news for motorists

Here's how fuel prices have risen over the past year:

Source: The AA (prices are shown per litre)

As you can see, the price of petrol has risen by 28% over the past year. However, the cost of diesel has climbed only half as fast, up 14% in 12 months. This is because a drop in global demand has weakened diesel prices, reducing the per-litre premium for diesel from 12p a year ago to under 2p today.

Although petrol prices are at their highest for 15 months, they have gone even higher. Eighteen months ago, the price of crude oil surged to $147 a barrel before collapsing. Thus, in mid-July 2008, the price of unleaded petrol peaked at 119.7p a litre, with a litre of diesel costing a whopping 133.2p.

The price of crude oil has risen from $35 a barrel a year ago to roughly $83 today, partly thanks to the recent cold snap leading to rising demand. This accounts for some of the rise in forecourt prices, but the remainder is largely down to higher fuel duty and VAT. Hence, most of this increase will go straight into the government's coffers.

Each year, the government plays an April Fool on motorists: a 1p-per-litre increase in fuel duty each 1 April. What's more, this is a 'real' increase (above the rate of inflation), so a cost-of-living increase is also tacked on.

Why fuel is so expensive

With the average motorist driving close to 9,000 miles a year, rising fuel costs are squeezing household budgets hard. For a car doing 10 miles to the litre (45 miles to the gallon), every 5p increase in the cost of a litre of fuel adds £45 to the yearly fuel bill.

What's more, a 24p increase in the cost of a litre of petrol means that filling up a 50-litre tank now costs £12 more than it did this time last year. Therefore, filling up every other week means coughing up an extra £312 a year.

So, why is vehicle fuel so expensive in the UK? The simple answer is that our government taxes fuel very heavily indeed, so the majority of the money you hand over goes to HM Treasury.

When you buy a litre of petrol or diesel, the price formula is: retail cost + VAT on retail cost + fuel duty + VAT on fuel duty = total price. That's right, the Chancellor really does charge taxes on taxes, as fuel duty -- a tax in itself -- attracts VAT.

At present, fuel duty is 56.19p per litre of petrol, so the formula looks something like this:

As you can see, the petrol itself costs 37.4p/litre, with the remaining 72.6p being taxes. Thus, two-thirds (66%) of your fuel bill goes directly to support Alistair Darling's spending. In other words, UK taxes make petrol three times as expensive as its underlying market cost.

Please don't get grumpy with your local petrol retailers, as fuel-price rises are beyond their control. What's more, they make a profit of a mere 2p a litre, so filling up your tank is worth just £1 to them. In effect, just as the cinema business is about selling popcorn and not movies, petrol retailers are in the convenience-store business, rather than the fuel market.

How to beat fuel rises

Here are three obvious ways to fillet your fuel bill:

• 1. Use less fuel, perhaps by buying a more fuel-efficient car or leaving your car at home and trying alternative methods of transport for short journeys. (This is easier said than done if you don't live in a metropolitan area.) Adopt our Cut your car costs goal to find out how to Cut your fuel costs.
• 2. Drive more efficiently, by planning ahead using the AA's Route Planner. In addition, driving smoothly by avoiding sharp braking and accelerating makes your engine less fuel-hungry. Adopt our Cut your car costs goal to find out how to Adjust your driving technique.
• 3. Pay less per litre, by using websites such as Petrol Prices to find the cheapest fuel in your local area.

Finally, to get even bigger discounts on your motoring bills, make full use of cashback credit cards, supermarket loyalty/reward cards, and money-off coupons for fuel. Also, don't renew your car insurance without shopping around first!

Adopt our goal to Cut your car costs

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