15/11/2011 04:13 GMT | Updated 14/01/2012 05:12 GMT

Fuel Prices - These Increases are Not Because of Tax

There is an impression that petrol and diesel prices have been increasing as a consequence of tax increases.

Actually, the tax-take during much of the 1990s was far higher, rising to a peak of 86% in early 1999. In other words, for every pound spent on a litre of petrol, 86 pence went to the Chancellor.

This trend has since been reversed, and the October 2011 tax-take was 60% for petrol and 58% for diesel.

I think we need to be clear what changes to duty and VAT have been made under the present government.

The previous government had planned increases for October 2010 and January 2011 and those were increases which were implemented by the present government under plans inherited from the last Labour government.

A VAT increase from 17.5% to 20% on 2 January 2011.

In the 2011 budget, George Osborne announced he would abolish the fuel duty escalator and instead cut duty by one pence per litre on 23 March.

He also announced a 'fair fuel stabiliser' where duty rises in line with RPI (Retail Price Index) inflation, plus one pence per litre when they are low for a sustained period.

This cut in the rate of duty on petrol and diesel of one pence per litre would have resulted in a real cut in fuel prices if pre-tax costs of fuel had remained the same.

The problem is that petrol prices have gone up since late last year, as a consequence of rising oil prices and the weaker pound.

Higher prices since early this year have been caused by higher oil prices following the political unrest in the Middle East, and particularly the revolt in Libya.

This uncertainty on the world's fuel markets has meant that petrol prices in the UK set new records in January, February, March, April and May of this year.

The mid-May 2011 price of 136.7p for a litre of unleaded petrol is the highest cash price ever. 141.5p for a litre of diesel in May was also the highest ever but as a note from the House of Commons library states:

"it is also clear that much of the trend in pump prices was driven by changes in the pre-tax prices rather than in fuel duty."

The UK used to have the highest duty rates for petrol of any country in the European Union.

The UK has moved down this list from first to ninth place, but the UK still has the highest diesel prices in Europe.

However, a number of factors have pushed up the relative price of diesel over time - the most important of which is the long-term increase in demand for diesel and the limited refining capacity.

Diesel became more popular than petrol in 2005 and this year again has seen a further increase in diesel sales and a fall in the volume of petrol but the difficulty is that refineries in the UK are configured to meet historical patterns of demand which maximise petrol and heavy fuel duty, so the output of UK refineries doesn't match UK demand and hence the UK has to import diesel, mainly from Russia and all of this increases prices.

Put starkly, 85% of the price increase in petrol over the last year has been related to changes in pre-tax prices, i.e petrol at the pump before any tax is added.

It is true that the fuel duty escalator which operated between 1993 and 2000 automatically introduced above-inflation rises in duty. However, that escalator ended after the September 2000 fuel protests.

Although the last Labour government effectively reintroduced a slower escalator in the 2009 Budget, the first increase was staged and the present Chancellor ended this automatic link in this year's budget.

So whilst people are understandably concerned about high petrol and diesel prices, these price increases are not as a consequence of increased taxes.