Anger as petrol prices accelerate back into the fast lane

Wholesale prices and tax rises are blamed for pump prices heading for yet another all-time high

Britain's petrol prices are poised to hit an all-time high and motorists frustrated by ever greater "pain at the pump" have both the oil industry and the Government in their angry sights.

The industry must explain how it sets the wholesale rates that are pushing up pump prices, say motoring groups. And the Government must rein back on planned tax increases that by themselves will tip pump prices over the record level that was set at the height of the 2008 commodities bubble.

The numbers make grim reading for Britain's drivers. The last six weeks has seen a surge in prices – from around 112p per litre in late January to 116.09p at the start of this week – as the wholesale petrol price shot up 17 per cent from $680 (£447) per tonne to $795 per tonne. As the rises are passed through to consumers, pump prices will rise to a whopping £1.20 per litre, even higher than the previous record of 119.7p in July 2008, warns the AA motoring organisation.

"The UK is barely out of recession, yet petrol prices threaten to rise to record prices seen during the boom of 2008 – shortly before the collapse into recession," Edmund King, the president of the AA, said yesterday. "If families, drivers on fixed incomes and those on low pay were unable to cope with record prices then, they are even less likely to now."

The industry must explain itself, but the global price of unrefined crude oil is no longer the obvious scapegoat. Petrol reached its previous high as the price of crude soared to a staggering $148 per barrel. This time around, the price of crude oil is still relatively low. London Brent crude prices have only breached the $80 level twice in the last 12 months, pushed up from December 2008's post-Lehman low of around $30 by coordinated production cuts from the 13 OPEC oil-producing countries.

Not only does the global oil price not provide a clear reason for rising petrol prices, but refining capacity is being cut back in both Europe and the US as oil majors react to pressure on margins caused by the sharp recessionary drop in demand, raising concerns that the industry is milking cash-strapped motorists. "The pain at the pump for British motorists is set to continue, and the real worry is where it will end," said Adrian Tink, motoring strategist at the RAC. "In 2008, there was a very obvious reason for the rises, whereas now government tax rises and oil companies' wholesale prices will draw the ire."

Peter Voser, the chief executive of Royal Dutch Shell, firmly put the blame on the market yesterday. "The UK is one of the most competitive and tough retail markets, so price setting is very competitive," he said. "You will get a reflection of the oil price on one side, but also refinery runs, how much diesel and gasoline is available in certain areas, as well as storage and distribution costs."

Far from raking in bumper profits, recent wholesale price rises result from a combination of gradual rises in the oil price in recent months that have been compounded by currency fluctuations, according to the industry. Whereas oil was hovering between $66 and $74 six months ago, yesterday Brent crude was trading at $79 per barrel and West Texas Intermediate at around $81. When that is added to sterling's fall against the dollar – from $1.50 at the end of November to nearer $1.37 yesterday – the impact is considerable. "If oil goes up, and the dollar goes up, then Europe's petrol prices get hit twice," one insider said.

Another factor is China, where gasoline consumption has ballooned by 26 per cent year-on-year since January. Without sufficient refining capacity of its own, China's rising demand has a tangible knock-on effect on global wholesale prices.

Similarly, the industry denies that Europe's shrinking refining capacity has impacted wholesale prices. Global refining capacity has long been ripe for re-organisation as it is around 4m tonnes greater than it needs to be, and is also in the wrong markets. Refineries in Europe no longer make sense, when crude is being imported for processing, only to be shipped back out to growing markets in the Middle East and Asia. Meanwhile, European demand is depressed because of the economic slowdown, which has also cut the US appetite to absorb the excess.

But none of these developments has any bearing on petrol prices, the industry claims. Any capacity cut in Europe due to slower demand "has no effect on the wholesale price", an industry insider said. "What affects the wholesale price is the cost of crude, and the currency exchanges."

The oil industry is not the only whipping boy for motorists. Rising wholesale prices are also upping the pressure on the Government to abandon tax rises due to kick in next month following the reintroduction of the fuel price "escalator" in last year's Budget.

Under the new rules, fuel duty will rise by inflation plus 1p every year for three years – which will add another 2.5p to 3p to prices in April. Fuel taxes have followed an inexorable – and highly unpopular – upward trajectory in the last 18 months and April's rise will be the fifth since December 2008.

In mid-2008, duty was running at 50.35p per litre, but was then raised by 2p that November to compensate for the reduction in VAT announced in the pre-Budget report – a move motoring groups branded as "robbing motorists of the benefits of the cut". The following April the duty was increased again, to 54.19p per litre, and again to 56.19p in September 2009, taking the total rises to nearly 6p per litre in less than a year, at a time when the world economy was tanking and consumer spending faced massive pressure. The irony, says the AA, is that the Government's ostensible purpose – to use the extra revenue to help shore up the tattered public finances – is undermined by its own admission, in last November's pre-Budget report, that the recession and price rises have pushed the tax take for 2009/10 down to £200m below its forecasts.

"The Government knows what the impact of pushing up the price of fuel is, so why do they expect to get more income from higher fuel duties when wages are not rising enough to allow consumers to absorb them?" an AA spokesman said.

Alternative price wars: Petrol vs diesel

Petrolheads may be squealing as pump prices approach an all-time high, but drivers of diesels are sitting pretty.

The prices of petrol and diesel are currently within a whisker of each other, which is good news for diesel drivers who may have splashed out an extra £1,000 or so on the upfront cost of the car but are hoping to recoup the outlay through its 20 per cent-greater fuel efficiency.

But times have not always been so good. Just as petrol soared to an all-time high of 119.7p in July 2008, so too did diesel – not only reaching 133.25p per litre but also soaring to its highest level above the petrol price, which was some 13.55p per litre below it.

A slight disconnection between diesel and petrol prices is not uncommon. Because diesel is produced from the same part of the barrel as heating oil, the price always tends to be subject to seasonal fluctuations. As demand rises with the onset of winter, particularly in the US, diesel prices rise accordingly. In a normal year, diesel costs go up by between 2p and 3p in the winter, only to fall back down again in the summer.

Not so in 2008. The problem was the massive demand for diesel from transportation and industrial processes to fuel the world's booming economic growth, and rising diesel car sales to drivers trying to escape high petrol prices.

Both petrol and diesel crashed with the world economy in the aftermath of the collapse of Lehman Brothers in the autumn of 2008. Now the gap between them is a bare 0.78p, because although petrol prices have recovered, industrial demand for diesel is still not what it was at the height of the boom.