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Should fuel prices be even lower?

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As pump prices fall, the proportion we give to the government in fuel taxes is rising. Campaigners are calling for a cut in duty – but is this realistic?

Petrol pump

Drivers all over the UK are celebrating as the price of fuel continues to fall.

At the time of writing, the average price of a litre of unleaded in Britain is just below 109p a litre, with some forecourts selling it at under £1.

Collapsing oil price

Diesel is 116p a litre at a typical filling station but less than 110p in some parts of the country.

The collapse in the price of oil since last summer has clearly been a boon for motorists: a barrel of Brent crude is now trading at less than $50 dollars, compared with $115 last summer.

But should fuel prices be even lower than they are at present? Are we getting a fair deal from retailers and – given that tax makes up the lion’s share of what we pay for fuel – the government?

It is a common complaint that when the cost of oil falls, petrol retailers as well as energy suppliers are slow to pass on the savings to customers.

Why have prices not fallen further?

On the other hand, critics say, when the value of oil is on the up, these companies are much quicker to increase what they charge.

An investigation by the Office of Fair Trading two years ago found no strong evidence that there was anything unfair about the way petrol retailers set prices.

But with the price of oil down by well over half since last summer’s peak, it is reasonable to ask why the cost of petrol and diesel has only fallen by around a fifth.

Part of the reason is that the raw material that goes into a litre of fuel – the oil itself – only represents a part of the overall price.

Tax is the big issue

Red toy car stacked on pound coins

There is also the cost of processing, transportation and retailing to take into account: the value of oil may have slumped but the same certainly cannot be said of these factors.

The real issue, however, is tax. The UK government imposes duty of 57.95p on every litre of petrol and diesel, with VAT at 20% then added to both the product price and the duty.

Because this duty is fixed, the lower the price of petrol is the greater the proportion motorists pay in tax.

According to the RAC, this means that the tax on petrol last July – when unleaded was almost 140p a litre – was just over 60%.

Greater tax take

This month, however, the proportion of fuel bills going to the treasury is almost 70%.

As you might expect, retailers now want the government to cut taxes so they can pass on more of the falls in the oil price to their customers and thereby boost sales.

But from the coalition’s perspective, it is not that simple: although the Treasury’s percentage take from each litre of fuel has risen, the government is actually getting less revenue per tank than last summer.

Tax at roughly 60% on a 140p litre of petrol works out at 84p, compared with 70% of 110p today – just 77p.

Lack of political pressure

This doesn’t necessarily mean we are paying less in duty overall – the lower price of fuel has boosted sales, and that could be enough to make up the revenue shortfall.

But if the government cut duty, it would probably need to raise tax revenues in other ways.

And with most drivers enjoying this unexpected fall in pump prices, it is hard to see political pressure to cut tax rising significantly in the next few months.

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