Blog: Dave LeggettOil price - tax distortions

Dave Leggett | 2 June 2004

There's plenty of media noise over the price of petrol in Britain right now, but a curious paradox struck me right between the eyes while watching Sky News last night. They had a nice little breakdown of the price of petrol per litre in the UK - so much for tax, distribution, the retailer and that little bit there is actually the price of the oil itself. It was a great table and I've just been trying to find something like it on the web and failed miserably (it's not even on Sky's website, which is a waste). But this is approximately the deal. On ultra-low sulphur petrol (which is unleaded and most of us use this) the pump price is around 80-odd pence a litre. Of that, duty taken by the government is currently 47.1 pence (yes, really). After costs of distribution and the retailer's take, the oil price raw material constituent in that 80 pence is only around 22 pence.

Yes, there's plenty of complaining about that tax take and further wailing and gnashing of teeth as the price of oil on international markets goes up and flows through to the pump price. But there's an interesting paradox here. Because the tax take is so high in the UK, only that 22 pence element stands to be affected by the current rise in the price of crude oil on international markets. In relative terms, Brits are being so punished by the high tax take that it acts as a somewhat perverse cushion, with over 70% of the pump price completely unaffected by what happens to the price of oil.

In the US by contrast, the pump price is a hell of a lot cheaper, but that 'actual oil price element' is a much higher percentage, more like 70-80% compared with Britain's 25-30%,  with very little or no tax taken (and pump price more like, say, 30 pence per litre). That means the feed through to the pump price of the rising price of crude oil will be proportionately very much greater. US consumers still have their gas cheap by international standards, but perceptions are what count of course. Especially in an election year. 


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