Motorists should brace for fuel duty hikes and ‘perma-high’ petrol costs, AA warns

Families, businesses and workers face an era of ‘perma-high’ road fuel costs, the AA warns.

A trifactor of fuel duty hikes, commodity price surges and swollen retailer margins is set to hit drivers hard in the pocket.

There are concerns the Labour Government is set to hike fuel duty – something Sir Keir Starmer refused to rule during the election campaign.

If the Treasury increases fuel duty in the Budget on top of the ‘bloated’ fuel retailer margins and already high commodity prices, it will ‘lock in and condemn UK families’ to huge outlays in the cost of fueling and getting on the road, the AA says.

In March 2022, fuel duty was cut by 5p. Until then, drivers faced the worst-ever average petrol pump prices in UK motoring history. 

The AA says ‘the 5p fuel duty cut was the only redeeming factor in three years (so far) of perma-high road fuel prices’.

The fuel duty slash was a welcomed relief, after a combination of the pandemic and war in Ukraine led to astronomic petrol pricing from late summer 2021 onwards.

There was just one brief period of two months when the average pump price of petrol remained below the pre-pandemic record set in April 2012 – when petrol reached 142.48p a litre.

July 2022 saw an all-time record average petrol high of 191.53p a litre.

Many motorists would struggle to absorb another sharp petrol price hike, with 28 per cent of AA members tied to a set spend when refueling, rising to 40 per cent among poorer motorists.

EVs, plug-in hybrids and self-charging hybrids offer an alternative, but despite falling public charging off-peak costs and savings to be made by charging at home, the upfront cost of new EV especially makes going electric unattainable for lower-income drivers in the near future.

FairFuelUK campaigned to keep fuel duty frozen since 2011 – and the Tories have stuck to that promise for the last 14 years.

In March, drivers were predicted to save £50 this year and £250 since the 5p cut was introduced, offering motorists a £1 billion tax relief.

But this relief will end if Chancellor Rachel Reeves reverses the fuel duty cut in the October Budget.

The Chancellor told the House of Commons this week that there’s a £22billion black hole in the country’s finances’ in need of filling.

A fuel duty hike is expected to be one announced as a means to fill the coffers, as Labour tiptoed around the subject during the election campaign. 

Sir Keir Starmer refused to entirely rule out a fuel duty increase, with the Prime Minister reluctant to say whether he would continue this decade-and-a-half trend.

Starmer said he’d supported a freeze ‘every single time it has come up’ but that ‘fuel duty will have to be decided budget by budget’.

Leading up to the election, Shadow Secretary of State for Transport Louise Hague told Auto Express: ‘On fuel duty – we want lower taxes on working people, which is why we’ve always campaigned against fuel duty rises in this Parliament.

‘Nothing in our plans requires us to raise any additional money beyond measures already announced.’

What’s causing sky-high petrol prices?

A few factors are at play here.

Oil and commodity fuel costs in the five years before Covid and the Ukraine war, Brent crude oil was $60 a barrel. Now it’s $80.

There industry standard is for a 1p a litre charge at the pump for every $2-a-barrel change in the price of oil, meaning the $20 increase has led to a £5.50 jump in the cost of a filling a typical 55-litre fuel tank.

And retailer margins are adding more than a 6p-a-litre increase to the cost of petrol.

In its Road Fuel Interim Monitoring Update last week, the Competition and Markets Authority reported that ‘petrol retail spreads in the four months to June averaged 12.62ppl, which was 2.55ppl lower than over the previous four months – but still more than double the average of 6.51ppl over 2015-19’.

That 6ppl equates to an extra £3.30 drivers are having to cough up.

A combination of three things is driving the increase in petrol pump costs, with crude oil now $20 more a barrel than five years ago

Then there’s the triple whammy of a weaker pound. The exchange rates currently means the pound is worth less than $1.3 compared to well above $1.4 pre-Brexit. Once commodity prices are subject to these rates, a motorist is getting stung with another £1.90 on every tank of petrol.

Luke Bosdet, the AA’s spokesman on pump prices, said: ‘Overall, the AA is concerned that current high prices could be made significantly worse with any hike in fuel duty in October.

‘However, the Budget on 30 October could be pivotal.

‘In the Spring Budget 2024 it was confirmed that fuel duty will remain frozen for a 14th consecutive year – and the then chancellor extended the ‘temporary’ 5p-a-litre cut for another 12 months. If the current Chancellor reverses this it will hit drivers, businesses, and the economy hard.’