When you see petrol at 142.9p per litre, have you ever wondered where that money actually goes? The answer might surprise you – and understanding the breakdown can help explain why prices vary so much between stations.
The Price Breakdown
Let's take a typical litre of unleaded petrol at 142.9p and break down exactly where your money goes:
Fuel Duty: The Biggest Slice
The largest single component is fuel duty – a flat rate of 52.95p per litre regardless of the pump price. This has been frozen since 2011, with successive governments choosing not to apply planned increases due to cost of living concerns.
It's worth noting that fuel duty is the same whether you're buying budget supermarket fuel or premium Shell V-Power. The government takes exactly 52.95p either way.
VAT: Tax on Tax
Here's the controversial part – VAT is charged on the total price including fuel duty. So you're effectively paying tax on tax. At 20%, VAT adds roughly 24p to every litre. When fuel prices rise, the government actually earns more from VAT.
Quick Maths
Combined, fuel duty and VAT account for about 54% of what you pay at the pump. For a 50-litre tank costing £71.45, approximately £38.40 goes straight to the Treasury.
Wholesale Costs: The Variable Element
This is where pump price fluctuations originate. Wholesale costs include:
- Crude oil price – traded internationally in US dollars
- Refining costs – converting crude oil into petrol and diesel
- Distribution – getting fuel from refineries to forecourts
- Bio-component costs – the ethanol blended into petrol
When you hear about oil prices rising or falling, this is the component that changes. However, there's often a delay – retailers are quick to raise prices when wholesale costs increase, but slower to reduce them when costs fall. This asymmetry is called "rocket and feather" pricing.
Retailer Margin: The Competitive Bit
The retailer margin is typically just 5-10p per litre – surprisingly slim for what seems like an essential product. This is the only part of the price that retailers can really control, and it's where competition comes into play.
Supermarkets often operate on margins as low as 2-3p per litre, using fuel as a loss leader to attract customers into their stores. Independent stations and motorway services need higher margins to cover their operating costs.
Why Do Prices Vary Between Stations?
Given that duty, VAT, and wholesale costs are essentially the same for everyone, why can prices vary by 15p or more between stations just a few miles apart?
- Competition – Areas with multiple nearby stations tend to have lower prices
- Operating costs – Rent, staffing, and business rates vary by location
- Volume – High-traffic stations can afford slimmer margins
- Business model – Supermarkets cross-subsidise fuel from grocery sales
- Captive markets – Motorway services face no nearby competition
What Can You Actually Control?
While you can't influence government taxes or global oil prices, you can control where you buy. The retailer margin might only be 5-10p, but that's the difference between the cheapest and most expensive stations in your area.
Use Fuelwise to compare prices and make sure you're not paying more than you need to. Over a year, choosing wisely could save you £200 or more.