Why Fuel Prices aren't 'Pump Fiction'

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Why fuel prices aren't 'pump fiction'

Over the last few weeks we have seen ‘Go Slow’ protests on motorways against the rising fuel prices and an article in the Mirror quoting Edmund V King OBE, President of the AA, that prices are ‘pump fiction’.

The subtext is that pump prices don’t reflect the wholesale market, and the article quoted a pump price for diesel of 198.96ppl. Phrases like ‘heinous’ and ‘regressive’ were used.

While I don’t for a minute dispute the massive impact wholesale energy price rises are having on people, especially the lowest paid, it is truly shocking to see the rate of inflation and consequent disconnect to wages.

But the solution to that problem is not to reduce the tax on a commodity which generates 40% of the UK’s carbon emission (when upstream refining is taken into account). Below I will discuss the reasoning for this, but I won’t go into the details of the broader issues as this post is about fuel and energy, not social value.

The fuel crisis isn't the result of taxation and pump price

There are a range of issues with the premise that fuel price challenges stem from unfair taxation and pump price profiteering. I’ll just call out the main two:

• Pump prices lag wholesale prices: this has always been the case as the RAC Foundation’s data shows. Wholesale prices have only just started falling so one would expect the pump price to follow shortly—it always has in the past as the data shows. This is exactly what you’d expect from a traded commodity which is stored in large quantities at the retail location (note – this also depends on $:GBP FX rate).

‘Regressive’ and similar statements are simply wrong. Fuel duty is a fixed figure per litre, so as the retail price goes up fuel duty actually becomes a smaller % of the cost. The very opposite of regressive.

The only solution that doesn't cost the earth

The real indicator should be the 'value' of fuel, because there are so many hidden costs. And the only viable solution is the transition to electric vehicles (EV). To make the case, I have done some calculations that compare the costs and efficiencies of diesel/petrol vs electric.

Diesel (and petrol) are massively inefficient fuels when well-to-wheels is considered. Typically below 20%: four times as much energy is used extracting, refining, transporting and burning the fuel as it actually converted into motion.

In contrast, an electric car is around 76% efficient end-to-end. A third of the energy converted into motion is lost in generation, distribution and motor processes. 400% process losses for ICE, 33% for BEV.

Taxation on diesel at 198.96ppl is 33.16ppl VAT and 52.95ppl duty, a total of 86.11ppl or 43% of the retail price.

The average diesel car does 43mpg = 9.5 miles per litre. A cost of 20.9 pence per mile whilst using 0.105 litres of fuel and emitting 0.2645kg CO2e (based on 2021 conversion factor of 2.51233 kgCO2e/litre).

An electric car gives ~4miles/kWh (I average 4.3 in my Kia eNiro). The current price cap at home is 28.34p/kWh, a cost of 7.1ppm using 0.25 kWh of electricity and emitting 0.0531kg CO2e per mile, 20% that of diesel.

Tax on electricity at home is 13% environmental tax + 5% VAT = 18% tax. 42% that of diesel.

For business it is 13% environmental tax + 17% VAT = 28% tax. 65% that of diesel.

Hence driving a BEV rather than in a diesel car you are paying between 2 and 3 times the tax per kgCO2e emitted.