Diesel Prices and Fuel Tax

Diesel prices and fuel tax

Diesel, an oil derivative, is the principal fuel for commercial vehicles. Its current UK price is approximately £1.10/lit, of which diesel duty makes up around 50.35p/lit – considerably more than the EU average of 24.97p/lit. Diesel prices rose by 20% in 2007 and the Chancellor of the Exchequer has scheduled a further 2p/lit rise in March 2008. On top of this, fuel prices also include 17.5% VAT. Diesel is also known as Derv, or ultra-low-sulphur diesel (ULSD). In the future all diesel will be sold as a 5% bioblend on forecourts as part of the government’s commitment to meet its 2010 Renewable Transport Fuel Obligation (RTFO)

Running Costs

Diesel accounts for 40% of road transport operators’ running costs. As such, fuel economy measures can have a huge effect on profitability. However, it is often not possible for road transport operators to pass on rising fuel costs to their customers. It is cheaper for operators to purchase fuel in bulk to be bunkered on their premises. Bulk diesel costs approximately 92p/lit. Drivers can also buy diesel with a fuel card, which is essentially a credit system.
What affects diesel prices?

Diesel prices are vulnerable to the underlying price of crude oil. In 2007 oil reached $100 a barrel. Factors affecting oil prices include:

• The accessibility of remaining oil fields
• Fears that oil production has passed its peak
• Rising global demand
• Wars
• Terrorist activity

The dollar-sterling exchange rate affects the price UK operators pay as all oil is purchased in dollars; hence a stronger dollar means UK operators get less for their money.
Why is UK diesel so expensive?

In a word, tax. In 1979 UK diesel was the third cheapest in the world; it is now the most expensive. In 1993 the Conservative government introduced a fuel duty escalator which set fuel taxes at 3% above inflation. This was for two reasons – to generate revenue and to discourage car use on environmental grounds. Subsequent governments have continued high fuel tax policies; politicians of both major parties say the Treasury will not cut fuel duty.
The future of fuel duty

The Conservative Shadow Cabinet has discussed re-introducing the fuel duty escalator. However, the current Labour government is piloting local road pricing schemes to which it has committed £18m in pump-priming money. Road pricing could theoretically remove the tax burden from fuel, although motoring would not become cheaper. It seems likely that regional congestion charges and road pricing will affect urban areas in the future; these policies are already in evidence in Durham, on the M6 toll road, and in London.

A recent government-commissioned report by Sir Rod Eddington appeared to support the introduction of a national road pricing scheme; however Eddington later backed down, saying he had only ever envisaged regional schemes as part of a package of solutions to congestion.

Road pricing would, theoretically, be tax-neutral – although whether this rebate would be given against vehicle excise duty (VED) or fuel is undecided.
The problems of high fuel duty

It can be argued that, environmentally, high fuel duty is beneficial in suppressing fuel use and forcing ever greater fleet efficiencies. Indeed it is one of the reasons the UK road transport industry is among the most efficient in the world.

However, there are a number of subsequent problems:

High fuel duty is inflationary

Continental hauliers are able to run much more cheaply in the UK on cheaper foreign diesel. Their vehicles often stay in the UK for several days at a time, undercutting UK hauliers for domestic work. This is particularly problematic in port regions as evidenced in the Burns Freight Taxes Inquiry.

There is a limit to the fleet efficiencies UK operators can make. Road transport is essentially a service industry and deliveries must therefore be made to the timescale and in the quantities demanded by the customer. It is also a highly regulated industry with delivery times, night-time running and vehicle size all limited by law.
High fuel prices are forcing UK operators out of business and costing jobs. The industry is losing a high proportion of firms to failure or consolidation and it has surrendered its place in the international haulage market almost entirely.

EU fuel duty harmonisation

The EU has long sought fuel duty harmony, recently insisting the minimum duty was raised. However EU law clashes with the rights of member states to set their own tax thresholds. It also limits the ability of member states to impose taxes such as a vignette on visiting commercial vehicles.
Campaigns against high fuel duty

The Freight Transport Association (FTA), Road Haulage Association (RHA) and trade magazines such as Commercial Motor and Motor Transport have long campaigned against the damaging effects of high fuel duty on the UK road transport industry. In February 2008 the FTA and RHA met with other trade sector organisations to secure backing for a cross-industry campaign.

They subsequently met with the Chancellor although to little apparent effect. Fuel companies are also afraid that high fuel taxes suppress demand for their product. There are also calls for open-book accounting, which details for freight customers exactly how much of their bill pays for fuel, and for fuel duty receipts at forecourts which show the amount of tax fuel consumers have paid.