What affects the price of UK fuel?

The price we pay for fuel at the pumps is affected by a variety of factors including the world price of crude oil, international exchange rates as refined fuels are sold in US dollars per metric tonne, and supply and demand around the globe.

Fuel retailers base pump prices on the wholesale cost of petrol and diesel, but there is typically a two-week ‘lag’ between pump prices moving to reflect any change in the wholesale price as this is the time it takes for fuel to work its way through the supply chain to the forecourt.

The total retail price paid at the pump also includes a significant amount of tax and VAT. This means that most of the price we pay at the pump goes direct to the Treasury, which together with other motoring taxes total more than £45bn a year.

Fuel price variations

Prices can also vary dramatically from region to region and even in towns that are only a few miles apart. Sometimes fuel can even be cheaper in a more rural location than in an urban one. Local retail dynamics also play a part.

Local prices are very often driven by the presence of supermarkets keen to compete on price or an independent forecourt retailer that is determined to offer the cheapest fuel.

If retailers in a particular area don't compete strongly on price this can lead to motorists paying more. 

Rural fuel prices

The Government has taken action to help some of the country’s most rural communities where the price of fuel was deemed to be negatively affecting residents. In 2012 the Government introduced the Rural Fuel Duty Relief Scheme which provided a 5p-a-litre fuel duty reduction for registered retailers in the Inner and Outer Hebrides, Northern Isles (Orkney and Shetland), the islands in the Clyde and the Isles of Scilly. In April 2015 the scheme was extended to include certain remote communities in mainland Scotland and England. 

The RAC believes the issues of price and security of fuel supply are key to the economic and social well-being of the UK, and that lower forecourt fuel prices actually help stimulate the economy. 

What impacts the price of fuel for drivers?

The price of fuel in the UK is influenced by a variety of factors, both domestic and global.

Here, we outline some of the key ones for drivers:

Crude oil prices

The largest factor is the price of crude oil, which is set globally. Oil prices are largely influenced by supply and demand, geopolitical tensions, natural disasters, and the decisions of large oil-producing nations.

Exchange rates

Since crude oil is priced in US dollars, fluctuations in the value of the British pound against the US dollar can impact the cost of oil in the UK. A weaker pound makes oil more expensive for UK buyers. Wholesale fuel is also traded in US dollars, so the stronger sterling is the better it is for UK drivers at the pumps. 

Taxes

Fuel prices in the UK are heavily affected by taxes. VAT (Value Added Tax) and fuel duty account for a significant portion of the price consumers pay. The UK government sets the rate of these taxes, and they can increase or decrease over time, affecting the final price.

Refining costs and profits

Crude oil must be refined into the petrol and diesel used in vehicles. The costs involved in refining also play a role in fuel prices.

Distribution

The cost of transporting and storing fuel from refineries to petrol stations also impacts the price at the pump. Retailers also add a mark-up, or margin, to cover their costs and make a profit. 

Competition and supply chain

The number of competing retailers and regional fuel supply issues can lead to price variations. If there’s a disruption in the supply chain, prices can spike temporarily.

Government

In 2022 the Government ordered the Competition and Markets Authority to investigate fuel retailers. Its market study later concluded major retailers had overcharged to the tune of £900m. The following year the CMA found retailers had overcharged drivers by £1.6bn. The CMA recommended there should be ongoing monitoring of fuel prices and that a Fuel Finder scheme should be created to encourage competition among retailers. The CMA became the price monitoring body and the Fuel Finder scheme, which involves all retailers having to report their prices to the Government every day, is due to go live in 2026. 

Global events

Geopolitical events, such as conflicts or tensions in oil-producing regions, natural disasters that disrupt production, or changes in global demand (as seen during the Covid-19 pandemic), can affect global oil prices and, in turn, influence UK fuel prices.