22nd November 2017

UK Petrol Prices Are Affected up to 75% by Tax. Oil Prices Have Decreased

Petrol station

by Enza Ferreri

For millions of people in Britain car fuel prices are a major concern.

How Much in a Litre of Petrol Goes to Tax?

Tax is by far the largest ccomponent in the price of petrol in the UK, which has one the highest fuel taxes in the world. The government's intention is to discourage people from using cars, because of the undeserved acceptance of the anthropogenic global warming theory, claiming that the fossil fuels in petrol for motor vehicles produce climate change.

Between 72% and 75% in the price of a litre at the pump goes into the coffers of the exchequer, divided between fuel duty at the fixed rate of 57.95 pence per litre and VAT (Value Added Tax) at 20%. This applies to petrol, diesel, biodiesel and bioethanol.

The little that remains of the price is shared among the company producing the crude oil from which petrol is derived, the distributor and the retailer.

Retailers buy crude oil on the global market, where prices, as it's normal, fluctuate with supply and demand: when the former goes down and/or the latter goes up, prices increase and when the opposite occurs prices decrease. Prices also fluctuate with changing currency rates of exchange.

Prices of oil have gone down, but there's little room for manoeuvre to reduce the petrol price to consumers when the price of crude oil decreases, because the taxes take the lion's share whatever the price of oil, as the Office for National Statistics explains.

Crude Oil Prices Going Down

With the exception of a surge in price in 2012, caused by tensions in Iran and the weak pound, the price of oil has constantly decreased for several years now.

Apart from temporary changes, for example when supermarket wars at big shopping times like Christmas cause large supermarket chains to reduce their petrol prices to encourage shopping at their stores or when oil-producing countries like Saudi Arabia decide to limit supply just in order to achieve price increase, which they've done many times before, there is a downward trend which has been fairly consistent.

There are few things whose cost is affected by international geopolitics as much as crude oil and potentially, in consequence, car fuel. But fracking has brought the price of oil down.

What determines oil prices then?

Petrol derives from crude oil and so, as we've said, its price partly depends on the latter's prices which, like every good, fluctuate with supply and demand.

But it's a bit more complicated than that. For a start, on the global market oil is not just traded for its use as a commodity but also for speculation in futures.

An oil futures contract is a binding agreement under which the buyer will purchase oil at a predetermined price per barrel on a predetermined future date. The overwhelming majority of futures trading is done by speculators, and under 3% of these buyers end up possessing and using crude oil.

The purpose of speculators is only to make a return on investment by trying to predict where prices are going and buying when they think prices will go up.

This determines a sort of virtual reality environment, in which what matters is not just the real demand for a commodity but also the demand based on expectation, aka "sentiment".

The simple conviction that oil demand will increase in the future may generate an increase in oil prices in the present, because demand is still demand, either with the goal of owning a good or to make a buck on it.

Could this have an effect on the spreading of peak oil theory? Conversely, the assumption that oil demand will go down in the future may cause a fall in prices in the present.

In this, oil is different from most goods, as oil futures contracts are strong determinants of price. The price of oil as we find it, for instance, in the media is in fact set in the oil futures market.

But this is not the end of the story. A powerful organisation enters the scene and moves the marionettes, not by going against the laws of the market but by playing them to the profit of its members. That international body is OPEC (Organization of Petroleum Exporting Countries), whose member states are in the Middle East, Africa and Latin America.

OPEC, founded in 1960 and uniting 13 countries which are among the world's biggest producers of crude oil by volume, is very influential, although it used to be more so before the recent fracking revolution.

Let's hear what its mission is from the horse's mouth, the OPEC website:

In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.

What this means in plain English is that OPEC, which has an estimated 42 percent of the world's oil production and 73-78 percent of the world's known oil reserves, regulates prices by withdrawing supply from the market when it becomes too abundant and price-depressing and at the same time ensures that supply is always sufficient to meet requirements lest scarcity pushes prices too high thereby making oil uncompetitive.

Outside of OPEC, the world's largest oil producers are the United States, Russia and Canada, which can also play the same tricks but they cannot influence global prices to the same extent as OPEC.

Even so, the history of the United States is a rollercoaster in this regard.

Although Romania, where oil was already exploited when this was a part of the Roman Empire named Dacia, was the first country with crude oil production officially recorded in international statistics, the USA was In the late 1800s and early 1900s one of the world's major oil producers, and its companies developed the technology to turn oil into the products we use, including car fuel like petrol.

But US oil production greatly decreased in the middle and last decades of the 20th century, giving rise to the fallacious theory of peak oil, and the country became an energy importer. In the present century, new technological developments, the most outstanding of which is fracking (or hydro-fracturing, to give it its proper name), has caused a second USA energy boom and reduced the power of OPEC.

Lastly, other accidental events may affect oil prices. An example is how oil prices tend to fluctuate during storm season: this is because the location of oil production is often not the place where oil is refined. Oil is shipped to refineries around the world, and a hurricane or other weather event could destroy the oil and increase its price.

 

 

Enza FerreriEnza Ferreri is an Italian web author, Philosophy graduate and former journalist living in London.

 

 

 

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