An update on the Competition and Markets Authority’s Road Fuel study puts supermarket practices in the spotlight
- Diesel prices remaining high
- What makes up the price of UK fuel?
- Why is supermarket fuel cheaper than an independent forecourt?
- Why is fuel so expensive on motorways?
- Why is diesel more expensive than petrol?
Mike Rutherford
Supermarkets have come under fire from the Competition and Markets Authority for failing to provide all the evidence required as part of the government’s competition watchdog’s inquiry into high fuel prices. “Whilst the level of engagement with the study has varied across supermarkets, we are not satisfied that they have all been sufficiently forthcoming with the evidence they have provided,” the CMA said in an update on its study issued on 15 May 2023.
“In particular, important information has only been received late in the day and after several rounds of information gathering. Given the concerns we have about a market of such importance to millions of drivers it is vital we get to the bottom of what is going on.”
As a result of the apparently obstructive response of supermarkets to its investigation, the CMA says it now intends to conduct formal interviews with senior executives at the major supermarket chains, in an effort to “get to the heart of the issues”.
So, far, the CMA says its investigation has led to concerns that although supermarkets are often the cheapest suppliers of petrol and diesel, there is less competition in the marketplace and that’s affecting prices. Without naming any particular supermarket, the CMA says it has seen internal evidence from one chain that it has increased margin targets, and that other supermarkets may have been aware of this and increased their margins accordingly.
Diesel prices remaining high
The CMA is also concerned about the diesel market, as supermarkets have retained higher margins on this fuel for longer than petrol. The watchdog says it “needs to understand whether weaker competition is part of the explanation for this”.
Once the supermarkets have appeared before the CMA to answer questions, a final report has been promised by 7 July 2023.
Commenting on the watchdog’s update, Simon Williams, the RAC fuel spokesman, said: We are very pleased to hear that the Competition and Markets Authority has confirmed what we have been saying for a long time about the biggest retailers taking more margin per litre on fuel than they have in the past. Currently, the average price of diesel is more than 20p a litre overpriced simply because they refuse to cut their prices. The wholesale price of diesel is actually 4p lower than petrol, yet across the country it is being sold for 9p a litre more – 154.31p compared to 144.95p for unleaded.
“Something badly needs to change to give drivers who depend on their vehicles every day a fair deal at the pumps. We hope even better news will be forthcoming later this summer.”
What makes up the price of UK fuel?
The price of fuel can be divided into three sections; the taxes imposed by the Government, the costs of drilling, refining and transporting, and the profit margins for the fuel companies.
For petrol, diesel and bioethanols, the Government gets around 65 per cent of the overall cost through fuel duty and value added tax (VAT). The fuel duty represents the fixed price of fuel – it stays the same regardless how much overall oil prices fluctuate. Currently, the Treasury adds 52.95 pence to each litre of fuel through fuel duty, and another 20 per cent through VAT. How much you pay in VAT depends on how much fuel you purchase.
The second biggest chunk comes from the wholesale costs of the fuel itself. The wholesale cost is a combination of currency exchange rates, global oil prices, and even domestic supply and demand.
Why is supermarket fuel cheaper than an independent forecourt?
In the past, supermarket forecourts have tended to offer the cheapest fuel prices and this was because of the market power supermarkets hold. Companies like Asda, Tesco, Sainsbury’s and Morrisons are all in competition with one another, so they have kept fuel prices as low as possible hoping that when motorists come to fill their tank, they might do their weekly grocery shopping, too.
In more recent times, however, fluctuating fuel prices have caused some analysts to question whether supermarket fuel really is cheaper. In September 2022, RAC fuel spokesman Simon Williams explained that, “there are lots of smaller forecourts which are now selling fuel much cheaper than the supermarkets. We would urge everyone to shop around for the best deals rather than simply assuming the supermarkets are the lowest because they have been in the past.” The Competitions and Markets Authority are looking at supermarket fuel pricing in a bit to “get to the heart of the issues” around apparently high fuel prices.
There are persistent rumours that supermarket fuel contains fewer additives and is of lesser quality than fuel from traditional forecourts, but there’s little hard evidence of this. All fuel sold in the UK has to abide by the standards set in the Motor Fuel Regulation.
Why is fuel so expensive on motorways?
Motorway fuel stations argue the reason their prices are higher is that many of them are open 24 hours a day and offer more services than a regular forecourt. Motorway fuel stations also pay high rent prices for the buildings they operate.
In more remote areas, fuel is often more expensive because of the higher transport and supply costs, but according to RAC fuel spokesman Simon Williams, this doesn’t apply to motorway stations: “We can see no reason why motorway fuel should be so much more expensive. In fact, arguably it is much easier from a delivery point of view than getting fuel to urban filling stations.”
Why is diesel more expensive than petrol?
Although diesel and petrol are taxed the same by the Treasury, historically diesel has been more expensive than petrol, as domestic refineries have struggled to meet demand. This has forced the UK to import diesel from other countries at a greater rate than petrol. In addition, diesel prices are pushed up by the cost of the additives that go into the fuel.
Furthermore, the gap between UK petrol and diesel prices widens during the winter. The end of the US “driving season” means retailers have a surplus of petrol they can’t export, so they sell it here at a lower price. Diesel demand, meanwhile, increases across continental Europe, where the fuel is commonly used in heating oil.
Recently, the influx of cheap diesel from countries like Saudi Arabia has turned the tide, swinging diesel wholesale prices closer to that of petrol, and bringing the pump price down with it. However the fact that we get a higher percentage of diesel from Russia than petrol means the advantage has swung the other way again.
Keyword: UK petrol and diesel prices: competition watchdog to quiz supermarket bosses on high fuel pricing