(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2dIl7bf
* Chart 2: tmsnrt.rs/2dIkXAx
* Chart 3: tmsnrt.rs/2dN3vHJ
* Chart 4: tmsnrt.rs/2dIljHc
By John Kemp
LONDON, Oct 11 British motorists should brace
themselves for more expensive petrol and diesel as the price of
fuel is hit by a double shock from rising oil prices and a
weakening exchange rate.
The initial impact of the Brexit vote on the cost of filling
up was masked by the sharp drop in oil prices, priced in
dollars, between the middle of June and the middle of September.
Brent crude prices declined by almost 10 percent between the
outcome of the referendum on June 23 and Sept. 19.
The lower price of oil helped cushion the impact of a weaker
currency, which declined by around 12.5 percent over the same
Forecourt prices for both petrol and diesel rose by less
than 1 percent between the outcome of the referendum and Sept.
19 as the two effects cancelled each other out (tmsnrt.rs/2dIl7bf).
Steady pump prices led some commentators to dismiss the
impact of a weaker exchange rate on the cost of imported food,
fuel and other items.
But now sterling is declining even further, and instead of
offsetting the impact, oil prices are rising strongly, which
makes it almost inevitable that pump prices will rise in the
days and weeks ahead.
The relationship between international oil prices and pump
prices is complicated because of the impact of refinery and
retail margins and but most of all because of the effect of
Britain levies some of the highest fuel taxes in the world
to raise revenue, encourage vehicle efficiency and meet climate
change commitments ("Fuel taxes by country", Alternative Fuels
Data Center, September 2016).
The government imposes a flat-rate excise duty of 57.95
pence per litre on both petrol and diesel sales and then a 20
percent value-added tax on the whole sale price (including the
The interaction of fuel duty and value-added tax creates a
minimum sales price of nearly 70 pence per litre for petrol and
diesel even if the price of crude oil were to fall to zero (tmsnrt.rs/2dIkXAx).
The large fixed tax element ensures pump prices do not
change by as much in percentage terms as the price of crude or
the exchange rate.
So the correct comparison is between pump prices excluding
duty (and VAT on the duty) on the one hand and the price of
Brent and the dollar exchange rate on the other (tmsnrt.rs/2dN3vHJ).
Brent prices have risen by almost 16 percent over the last
three weeks. Sterling has fallen by almost 6 percent over the
So far, the pump price of both petrol and diesel excluding
fixed-price tax elements has increased by just 2.5 percent over
the same period.
Fuel refiners and retailers may accept some degree of margin
compression to protect volumes and non-fuel sales (most fuel
retailers also sell groceries and other items on which they make
But the scale of the movement in oil prices and the exchange
rate is such that fuel refiners and retailers are unlikely to
absorb it all.
Unless oil prices fall, or sterling recovers, Britain's
motorists face a significant increase in pump prices over the
next few weeks.
The price of fuel, currently around 112 pence per litre for
petrol and 114 pence per litre for diesel, is likely to rise
closer to 120 pence per litre for both fuels.
Fuel prices would be at their highest level since December
2014, though still below their recent peak of 130 pence per
litre before oil prices began to slide in July 2014 (tmsnrt.rs/2dIljHc).
Britain's Petrol Retailers Association has warned pump
prices will move "sharply upward" unless recent currency and oil
price moves are reversed ("Motorists to be hit by rising pump
prices", PRA, Oct. 10).
"Platts wholesale costs to retailers have increased by over
6 pence per litre for petrol and 7 pence for diesel in the last
few weeks, whereas the UK average pump prices have moved up by
less than 2 pence," the PRA warned on Monday.
"Thus motorists can expect increases of up to 4 or 5 pence
per litre by the end of the month unless there are favourable
corrections to the exchange rate and to global oil prices."
The PRA is lobbying the government to cut fuel duty in the
forthcoming autumn statement by 3 pence per litre to offset the
impact of higher oil prices and currency weakness.
(Editing by David Evans)