The UK’s diesel price hitting an average of £2 a litre is a stark illustration of a “perfect storm” of global and domestic factors impacting the energy market. Here’s a breakdown of the key reasons:
1. **High Global Crude Oil Prices:**
* **Supply & Demand Imbalance:** After the initial shock of the pandemic, global demand for oil rebounded faster than supply. OPEC+ (the Organization of the Petroleum Exporting Countries and its allies) has been slow to increase production significantly.
* **Underinvestment:** Years of underinvestment in oil production capacity, partly due to a global shift towards green energy, means there’s less spare capacity to quickly ramp up output.
2. **The Russia-Ukraine War and Diesel Specifics:**
* **Crucial Role of Russia:** Russia is a major global supplier not just of crude oil, but specifically of refined diesel (also known as distillates or gasoil) to Europe.
* **Sanctions & Self-Sanctioning:** While not all Russian oil and gas has been completely sanctioned globally, many companies, refiners, and shipping firms are voluntarily shunning Russian supplies due to reputational risk or future sanction concerns. This has significantly reduced the available supply of diesel to the European market.
* **Redirection of Trade:** Europe is now scrambling to find diesel from other sources (e.g., Middle East, India), which involves longer shipping routes, higher costs, and increased competition.
3. **Global Refining Capacity Shortages:**
* **Closures:** Even before the war, several refineries worldwide (including in the US and Europe) closed down during the pandemic or were repurposed, reducing the overall capacity to turn crude oil into products like petrol and diesel.
* **Diesel Focus:** Refineries globally have been struggling to meet the high demand for middle distillates (which includes diesel, heating oil, and jet fuel), leading to “distillate cuts” where they produce less diesel to prioritize other products or due to lack of capacity.
4. **Strong Global Demand:**
* **Economic Recovery:** Post-pandemic economic activity has picked up, meaning more goods are being transported (trucks, ships, trains, all run on diesel), more industrial machinery is operating, and general commerce is driving up fuel consumption.
* **Industrial Use:** Diesel is the lifeblood of industrial economies, powering not just vehicles but also construction equipment, generators, and agricultural machinery.
5. **Weak Sterling (GBP/USD Exchange Rate):**
* **Dollar Denominated Oil:** Crude oil and refined products are primarily priced in US dollars on international markets.
* **Impact on UK:** When the British Pound weakens against the dollar, it makes buying oil more expensive for UK importers, even if the dollar price of oil remains stable. The pound has been relatively weak against the dollar, adding to the cost.
6. **UK Fuel Duty and VAT:**
* **Fixed Costs:** While not a *cause* of the recent surge, taxes remain a substantial component of the final price at the pump. The UK has one of the highest fuel duties in Europe (currently 52.95 pence per litre), plus 20% VAT charged on top of the fuel price *and* the duty. This provides a high baseline upon which the increases build.
**Why is diesel worse than petrol right now?**
While petrol prices are also high, diesel has been hit disproportionately due to:
* Europe’s specific reliance on Russian diesel supplies.
* The global shortage of refining capacity for “middle distillates,” which include diesel.
* The high industrial and commercial demand for diesel globally.
This record high is having a significant knock-on effect on inflation, supply chains, and the cost of living, as businesses face higher transport costs which are then passed on to consumers.
