Fleet News

Fuel management: No respite on the horizon from rocketing fuel prices

It can’t have escaped your notice that filling up with fuel at the moment is wallet-smokingly expensive.

Average prices have burst through the £1-a-litre barrier which, for any business running vehicles, is a large fiscal hit to absorb.

But why, exactly, is fuel so expensive right now?

The cost of fuel is made up of the base cost of the product, the VAT and the fuel duty imposed by the Government – a sizeable amount.

“The challenge in the UK is that we have the highest duty rates in Europe, particularly on diesel,” says Mike Waters, head of market analysis at Arval.

“Generally we have the highest overall price for diesel in Europe, but not always on unleaded petrol.

“Most other countries differentiate in the level of duty between unleaded and diesel, whereas the UK doesn’t.”


    Various factors have sent the price of filling up rocketing recently, not least the cost of oil from which diesel and petrol are made.

    From the late 1980s – apart from a brief blip during the first Gulf War – the price of oil stayed fairly consistent at about $25-$30 a barrel.

    But in 2003 the prices started to escalate, thanks to the second Gulf War and increased demand from developing economies such as China and India.

    “In 2005 we had hurricanes Katrina and Rita, terrorism and concern over Iran’s nuclear programme,” Mr Waters explains.

    “There was a whole host of factors that conspired to escalate prices over a two to three-year period.”

    This year prices came down in January to a fairly reasonable level – about $55 a barrel.

    But during the year that escalated, due to a tight supply market.

    “That mirrored what happened in 2006,” Mr Waters says.

    “The difference this year is that since September prices escalated again, while in 2006 they cooled down.

    “The market has been so tight in supply terms that we have seen a rise in price.”

    A key problem is that refineries, where oil is converted to fuel, are stretched.

    “Refinery capacity is still an issue and there are concerns over the long-term supply and demand balance in the crude oil market,” says Mr Waters.

    “There is relatively limited spare capacity to increase the level of crude in the market if there was supply disruption.”

    While US house prices do not seem to have a huge amount to do with UK fuel prices, the credit problems across the Pond have had a direct impact.

    “There’s been a lot of speculation in the oil market which has been increased by the credit crunch in the US,” Mr Waters says.

    “A lot of money that would have gone into equity markets has gone into commodities.”


    All the main industrial countries retain stocks of crude oil and fuel to get them through emergencies.

    But right now, stocks in the US are at their lowest level for the past five years.

    “They are running lower than the market likes them to be at,” says Mr Waters.

    “At some point the Government will have to come back into the market to replenish its stock levels, but it won’t want to do that while the price is high.

    “However, keeping low stock levels maintains the prices so it’s a vicious circle.”


    So what’s going to happen?

    “We’re at a high price going into the winter, which is unusual,” Mr Waters explains.

    “If there’s a very cold winter that will put a lot of pressure on the market once again.”

    Not all the news is bad however – more problems for America could mean good news for us at the pumps.

    “There is speculation that the US economy could struggle in the first half of 2008,” Mr Waters says.

    “If that reduces US demand it will take some pressure out of the market.

    “And if we have a good winter, that will take pressure off heating oil and also help.”

    It’s not all doom and gloom.

    “Extra capacity is due to come online in 2008, although it probably won’t make an impact until later in the year.”

    Fuel duty rose by 2p per litre last month and further increases are planned next year.

    “We would urge the Chancellor to keep those increases under review and respond to market conditions at the time,” Mr Waters adds.

    “If prices are very high it may not be the best time.

    “We already have high rates of fuel duty and it’s an additional cost that businesses have to pass on.”

    Whatever happens as we go into 2008, don’t expect to see pump prices fall in the immediate future.

    “We’re going to be hovering around £1 per litre up until the turn of the year,” Mr Waters says.

    “We’re in a high price market at the moment and it’s difficult to see where the price fall will come from.”

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