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Why petrol and diesel prices do not fall with oil prices

The RAC said diesel prices increased by more than 8p a litre to 163p last month, while petrol prices rose by 4.5p a litre to 152p. Photo: Getty.
The RAC said diesel prices increased by more than 8p a litre to 163p last month, while petrol prices rose by 4.5p a litre to 152p. Photo: Getty. (Hollie Adams via Getty Images)

Retailers in the UK have been accused of charging “unjustifiably” high fuel prices as the recent rally in oil prices has fed through to the pumps.

However, when oil prices ease, this does not mean the price will fall for consumers too with the RAC saying its analysis suggests that petrol was overpriced by about 7p a litre in September.

It comes as diesel prices increased by more than 8p a litre to 163p last month, while petrol prices rose by 4.5p a litre to 152p.

“In the last two weeks the wholesale cost of diesel has become 10p a litre more expensive than petrol, yet the gap at the pumps is only 5p. If retailers as a whole were playing fair with drivers, petrol would be at least 7p cheaper than it is now, down to about 150p from its current average of 157p,” RAC fuel spokesperson, Simon Williams, said.

At the time of writing, oil prices were lower with US crude oil, or West Texas Intermediate (CL=F), falling 1.19% to trade at $88.17 (£72.78) a barrel, while Brent crude (BZ=F) was down 1.09% to $89.93 a barrel, in the red but still hovering near $90.

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Russ Mould, investment director at AJ Bell, shared his view on the correlation between prices at the pumps and crude markets: “We do not put crude oil in our cars, we put it in refined products – diesel and petrol. This means that changes at the pumps reflect not just the price of oil but the cost of refining (which can vary according to availability of capacity) and then moving the refined products to their final destination.

“There is then also the issue – recently addressed by the government – of competition at the pumps, something the public may feel is lacking sometimes. The announcement back in July that retailers will have to provide a live feed tracker for petrol and diesel was designed to address this issue,” he said.

What's preventing oil prices from moving higher?

Susannah Streeter, head of money and markets at Hargreaves Lansdown, further noted how oil prices have dipped back further and put it down to worries continuing to swirl about the effect of high interest rates on economies.

"Concerns about the US potentially heading for a more difficult landing if monetary policy stays ultra-tight, have weighed down prices in recent sessions."

She also told Yahoo Finance UK that no major tweak is likely to be announced at the OPEC gathering to production cuts already announced by Saudi Arabia and Russia. However, she said comments from energy ministers will be closely watched.

"With tighter supply colliding with expectations for demand to keep growing this year, a higher floor is still likely to be kept on prices.

As far as petrol prices are concerned, she also commented, that although they are inevitably linked to the cost of oil, there are many other factors to consider, such as refining capacity and demand for other oil fractions, so the rise or fall in Brent or WTI Crude won’t translate to an identical hike at the pumps, as Russ Mould also noted.

"Even when you include transport and processing, the cost of oil is only part of the final fuel price as the tax take is so significant. Companies running petrol stations operate with razor-thin margins and often rely on sales from forecourt shops to boost profits," Streeter added.

Call for more transparency amid cost of living crisis

The higher fuel prices being felt at the pumps come as a coalition of 140 organisations and MPs have called on the government to consider introducing a social tariff to help with energy bills this winter as the costs for consumers continues to soar.

In an open letter to the British Prime Minister Rishi Sunak, it said support would stop people having to face a "desperate choice... between heating and eating".

The letter also said that average household energy bills will be 13% higher this winter than they were last year.

From 1 October, the energy price cap will fall to £1,923, down from the current £2,074. Last year, households received £400 of support over six months but this year the government is yet to announce any equivalent support.

What’s behind the higher oil prices?

Supply concerns continue to weigh on the minds of investors ahead of the next OPEC+ meeting later today which could see Saudi Arabia extending its crude output cuts.

One of the reasons why economists think Saudi Arabia may extend cuts at the next OPEC+ meeting would be to keep oil prices higher to help support its economy, which is already in a recession since its mining sector activity dropped by more than 25% on a year-to-year basis.

Read more: FTSE and European stocks slump after sell-off in US government bonds

Meanwhile, members of OPEC+ have been in attendance at an energy conference in Abu Dhabi where higher oil prices were widely discussed.

The Secretary-General, Haitham Al-Ghais, said on Monday that OPEC is optimistic on demand and sees under-investment as a risk to energy security.

“We are...running quite low on spare capacity; we have said this repeatedly and this requires a concerted effort by all of the stakeholders to see the importance of investing in this industry,” he said.

The UAE’s Energy Minister Suhail Al-Mazrouei echoed the call and said investment by both international and national oil companies was needed.

If OPEC does go ahead with further cuts on Wednesday it could further negatively impact consumers, especially for fuel and transportation costs.

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