Why diesel costs more than petrol
(even though it is cheaper to make)
It will come as no surprise to inhabitants of the UK that we pay more for our fuel than most. In a time when uncertainties over crude oil supply, particularly in the Middle East, have caused record price highs at the pumps, it is all too hard not to come to this depressing realisation. What may be surprising though, is that within the league rankings of over-priced fuels, diesel is more expensive than petrol.
Any GCSE chemistry student can tell you that diesel requires less refining than petrol and less crude oil to produce. Hence the heavy clouds of black smoke so characteristically emitted by older generations of diesel powered cars. But, if that is indeed the case, then the discerning reader will perhaps be wondering why exactly such cheaply produced diesel should be more expensive than petrol. Part of the problem is that diesel isn't actually as cheap to produce as some people think, at least not the modern "clean" variant anyway. Although diesel requires less crude oil per litre than petrol does to produce, newly established standards for lower sulphur diesel require a more complex refining process.
Despite these reductions in sulphur emissions, standard diesel fuel is still taxed more heavily than petrol. In 1994, duty on diesel and unleaded petrol (ULP) was the same, however from 1996 through to 1998 diesel was around a penny per litre more expensive. In 1999 it became three pence per litre. At this stage, ultra low sulphur diesel (ULSD) was introduced into the market and, by 2000 the majority of diesel being sold changed to ULSD. This carries a lower duty rate than standard diesel, and by 2001 the differential between standard diesel and ULSD was up to six pence per litre. However, since 2003 high oil prices have caused the duty on all fuels to rise drastically. In the last 2½ years alone a tripling in oil price has caused the price of fuels to rocket, and it seems to have been the case that diesel users have suffered more than the rest of us. If this were the whole picture though, then fuel would be as expensive everywhere as it is here in the UK. The fact of the matter is that, even with the hike in oil prices, almost three quarters of the petrol station price for any given fuel is government duty. Considering that Britain's motorists buy over 30 billion litres of fuel a year, that's a lot of tax.
The effect of taxation specifically on diesel is made clearer when price differences between diesel and ULP are compared with those of other countries. In France for example, diesel remains cheaper than petrol. This is partly because subsidies have been introduced in an effort to keep it affordable for farmers in particular. At one time such subsidies were implemented by the UK government and the tax on diesel was reduced to the extent that it became substantially cheaper than petrol. Similarly in Ireland, businesses are allowed to claim back the 100% of the VAT on diesel but nothing for normal petrol while in Portugal, the amounts are 50% for diesel and 0% for petrol.
To some extent, such subsidies and tax breaks offer a slightly false view of the general picture. When all is said and done, diesel is just another commodity in a market driven economy, subject to the same rules of supply and demand as everything else. Particularly in a country like the UK, which is now a net importer of fuel, local diesel prices are affected by international supply and demand. Furthermore, almost 80% of the cars on the road run on ULP. There is room for increasingly competitive sale of unleaded petrol. Diesel on the other hand, has a smaller retail demand than ULP, so the competitive forces at work are not as strong. The result is that diesel prices are a lot more stable. Fluctuations between the prices of ULP and diesel are usually a result of greater changes to unleaded prices than to diesel's.
Even though diesel prices tend to change less, the difference between the lowest and highest priced petrol stations can still be quite large, at least 5 pence per litre at most times. Just to put that in perspective, according to the Department of Transport annual statistics for 2005, the average motorist clocks up an annual mileage of 9000 miles. With the average petrol car consumption at 30mpg, that means an astonishing 1363 litres (300 gallons) of petrol every year. This means that visiting a cheaper petrol station could theoretically save you at least £68 a year. PetrolPrices.com is the ideal place to find the cheapest petrol in your local area.
When comparing diesel and petrol prices, it is important to remember one thing. One of the key attractions of a diesel powered vehicle is that its engine is generally much more efficient than a petrol run equivalent. This is why diesel cars are usually slightly more expensive. A good diesel engine can get as much as 50mpg compared to the average 30mpg of a normal engine. To return to the previous example, 9000 miles at 50mpg would require only 819 litres (180 gallons) of petrol as opposed to 1363 litres (300 gallons) at 30mpg. From January 2005 to January 2006, the average petrol price rose from 79.6 pence per litre to 89.4 pence, whilst diesel prices rose from 84.8 pence per litre to 93.5 pence. Taking average prices of 84.5 pence and 89.15 pence for petrol and diesel respectively:
1363 litres x 84.5 pence per litre = £1151.74
819 litres x 89.15 pence per litre = £730.14
Clearly, diesel is more economical in the long run even though it is more expensive per litre. This is slowly changing though. The newest ULP engines are squeezing out more mpg for the same amount of petrol. If petrol cars are soon likely to match the efficiency of their diesel counterparts, then car companies could well find themselves having to think of new reasons why people need to buy diesel. As things stand, that reason won't be for cheaper fuel. Current price trends don't seem to indicate diesel prices dropping any time soon and the vast majority of motorists still use unleaded.
