Oil costs tumble as prices at the pumps fail to respond

As oil prices have dropped in recent months – reduced from £72 per barrel in June to just £53 per barrel today – the government are putting pressure on oil companies to reflect this in reductions at the pumps.

In a recent speech, Chancellor George Osborne said the government would be watching oil companies ‘very carefully’ to ensure a fair price for motorists.

While the cost of oil has reduced by almost a quarter in recent months, petrol prices have experienced a far gentler decline – from 131.7p per litre in late summer, to 124.22p on average, which represents a reduction of around 6%.

This might lead some to question where the money is going, but the answer seems obvious: into the pockets of fuel companies. However, some argue that, since the cost of fuel is mostly taxes, the government are in a far better position to reduce taxes than oil giants.

This comes from estimates courtesy of the AA, which suggests about two-thirds of the costs motorists pay is made up of Value Added Tax (VAT) and fuel duty. In the case of the 124.22p average price of a litre of petrol this works out at 20% and 57.95p respectively.

While fuel price reductions are small, the fact that there is a drop in cost at all can be credited to a war between British supermarket chains. ASDA was the first to reduce prices, knocking off 1p per litre before its rivals did the same thing – TESCO, Sainsbury’s and Morrison’s all following suit.

According to data from Experian, if VAT and fuel duty are discounted, the price of petrol has actually dropped 21% in the last year – much closer to the 25% drop in oil prices.

It seems it is fixed government rates responsible for consistently high costs, not necessarily corporations.

Another explanation for high prices could be due to the state of the pound. As oil is often traded in dollars, the comparatively weak pound means the drop in oil is less keenly felt here than on American shores.

Still. The Government maintains that companies should do their bit, Mr Osborne saying:

“Our message is clear - the oil price has fallen and we expect that to be passed on to people at the petrol station filling up their cars.”

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