Prices at the pump: why so high?

Logistics Development Manager at the RHA, Nick Deal, takes a detailed look at the current issues around diesel costs - and why the prices at the pumps are so high at present.

The COVID-19 pandemic, or rather its effect on oil consumption, kept the price of Brent oil really low throughout 2020. But in 2021, as the economy started up again, prices went from $54 to $86 in October before dropping back to $78 by the year end.

Now, just two weeks into January, prices are back around $85 with talk of $90 or even $100 later in the year. We’ve not seen Brent at $100 since mid-August 2014, and back then the pump price was around 134p per litre.

OPEC+ – the Organisation of Oil Producing Countries – plus others like Russia, who are not in OPEC, have agreed to raise production by 400,000 barrels per day (bpd) from February 2022. For context, in 2021 the typical oil production was 26.3 million bpd which was an increase of 700,000 bpd on 2020. It is in effect a supply and demand scenario that is revisited every month to keep a price that the producers are happy with by balancing production against likely demand.

Highest ever pump prices

At the pump, the current average for diesel is around 149ppl. If Brent was to reach $100 we would be looking at pump prices of around 158.5ppl (vat inclusive) as an average. That would be 8ppl higher than the AA recorded November 2019 as the highest month in history at 150.5ppl.

For haulage operators it would add around £3,700 to the cost of operating at 44-tonnes or approximately 2.1%.

So why are prices so high with only modestly high oil prices? It comes down to the increasing proportion of biofuel in the calculation of a litre of fuel. That and the price differential between regular diesel and FAME (the bio diesel) which is now nearly three times as expensive.

The Renewable Transport Fuel Obligation (RTFO) details what percentage of a litre of fuel needs to be produced from renewable sources (biofuel). In 2021 the bio element was calculated using a figure of 9.93% but from 1 January this is now 11.72%. So, the sum goes like this; 88.28% of cheaper regular diesel plus 11.72% of FAME at nearly three times the expense plus something called the Development Fuels Obligation. Between these two aspects the price of a litre of diesel overnight (as we crossed into the New Year) went up by approximately 1.9ppl ex vat.

Each year, the bio element (for calculation purposes) will keep growing at present until 2032.

Go green, switch to gas?

With fuel duty (in the UK) for natural gas fixed by regulation at 24.7p/kg (approximately 18.6p/litre of diesel) until 2032, compared to diesel duty at 57.95ppl you would normally assume a gas advantage and indeed in 2020 that is what we said. At the beginning of 2021 on an example journey diesel was 33% more expensive than gas (LNG). However, by November the result had completely swung in favour of diesel with the gas price increasing faster meaning gas was then 31% more expensive than diesel!

RHA keeps extensive records of fuel related pricing and for members publishes weekly (and monthly) updates to fuel related averages through its members bulk fuel survey.

If you wish to take part in the survey (supplying prices) or receive the reports please contact Nick Deal [email protected]