The record-high price of diesel in the UK, averaging £2 a litre, is a result of a “perfect storm” of global and domestic factors, with some pressures impacting diesel more severely than petrol.
Here’s a breakdown of the key reasons:
1. **High Global Crude Oil Prices:**
* **Demand Recovery:** Post-pandemic economic reopening has driven up demand for oil globally.
* **OPEC+ Policy:** The Organization of the Petroleum Exporting Countries (OPEC) and its allies (OPEC+) have been slow to ramp up production to meet this increased demand, maintaining a cautious approach to supply.
* **Underinvestment:** Years of underinvestment in new oil and gas exploration and production have limited the ability to quickly increase supply.
2. **The “Diesel Squeeze” – Specific Pressure on Diesel:**
* **High Demand for Diesel:** Diesel is not just used in cars; it’s the fuel of choice for commercial vehicles (trucks, vans), buses, trains, agricultural machinery, and industrial equipment. It’s also chemically similar to heating oil. As economies grow, so does demand for logistics and industrial activity, pushing up diesel demand.
* **Refining Capacity Shortages:** There’s been a global reduction in refining capacity over recent years due to closures (driven by lower margins, environmental regulations, and energy transition plans). This means less capacity to turn crude oil into refined products like diesel and petrol.
* **Diesel “Crack Spreads”:** The profit margin for refiners making diesel (the “crack spread”) has been exceptionally high, indicating that demand for diesel is outstripping supply even more significantly than for petrol. Refiners are prioritising diesel production, but there isn’t enough to go around.
3. **Russia-Ukraine War and Sanctions (Crucial for Diesel):**
* **Impact on Russian Supply:** Russia is a major global supplier of both crude oil and, critically, **refined diesel** to Europe.
* **Supply Disruption:** Sanctions, boycotts by many companies, and the general uncertainty stemming from the war have severely disrupted Russian oil and diesel exports to European markets. Europe is scrambling to find alternative diesel supplies from further afield (e.g., India, the Middle East, the US), which adds to shipping costs and global competition.
* **Fear Premium:** The ongoing geopolitical instability adds a “fear premium” to oil and fuel prices, as traders worry about potential future supply disruptions.
4. **Weak Pound (GBP/USD Exchange Rate):**
* **Oil Priced in Dollars:** Global oil is priced in US dollars. When the British pound weakens against the dollar, it effectively costs more in sterling to buy the same amount of oil.
* **Current Weakness:** The pound has been relatively weak against the dollar due to concerns about the UK economy, high inflation, and political uncertainty.
5. **High UK Taxes:**
* **Fuel Duty:** A significant fixed component of the price is fuel duty, currently 52.95 pence per litre for both diesel and petrol (after the 5p/litre cut in March 2022).
* **VAT:** Value Added Tax (VAT) at 20% is charged on the *total* price, which includes the fuel duty. So, as the pre-tax price of fuel rises, the absolute amount of VAT collected also increases significantly. A substantial portion of £2/litre is tax.
6. **Rising Operating Costs for Retailers:**
* **Inflation:** Forecourts face rising costs for electricity, labour, insurance, and the transportation of fuel, which are passed on to consumers.
In summary, the UK’s diesel price has hit an all-time high primarily because of elevated global crude oil prices, a particularly acute global shortage of refined diesel exacerbated by the war in Ukraine and reduced refining capacity, combined with a weaker pound and high domestic taxation.
