Industry braces for sustained high UK fuel prices: 2022 preview

Petrol and diesel prices remain high going into 2022, but could show signs of easing after the first quarter of the year

fuel pumps lined up at the petrol station

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While UK petrol and diesel prices could remain high going into 2022, as retailers attempt to make back losses felt by the pandemic, levels are unlikely to go much higher and could start to show signs of easing after the first quarter of the year, sources told Fastmarkets EnergyCensus.

Petrol and diesel prices reached all-time highs in November 2021, climbing to 147.72p a litre and 151.10p a litre on 20 November, which came despite a drop in both oil and wholesale prices.

According to the UK motoring agency the RAC, however, prices for petrol should be around the 135p mark and 144p for diesel.

“UK petrol and diesel prices should obviously be lowering because not only has the price of oil dropped, but petrol and diesel wholesale prices had already fallen before news of the Omicron variant came out,” RAC fuel spokesperson Simon Williams told Fastmarkets EnergyCensus.

While the RAC and fellow motoring association the AA have voiced strong opposition to climbing retail prices and called for greater transparency with fuel pricing, they’re hopeful this won’t continue into the new year.

Part of the reasoning is the rapid spread of the Omicron variant of COVID-19 and possible subsequent restrictions, which could further weigh down oil prices.

“But the fact that retailers haven’t made cuts after a long period of lower wholesale prices is a real concern,” Williams said, adding, “it’s as if they’re just waiting for the oil price to go up and for the wholesale price to rise too so their lack of cuts will be justified.”

The AA echoed this sentiment, with head of roads policy Jack Cousens highlighting “it is clear that retailers are as slow as ever to pass on any reductions at the pumps.”

According to Wood Mackenzie (Woodmac), UK fuel prices are at the top end, but will remain elevated into 2022.

“The crude outlook for 2022 sees the maintenance of a high price throughout the whole of year, remaining elevated given OPEC’s monthly management of supply so we expect it to remain within the $70/barrel range,” Woodmac’s short term refining and oil product markets principal analyst Mark Williams said, adding that this will have a “knock-on effect” on gasoline and wholesale prices too.

Meanwhile, rising agricultural costs have filtered through into fuels and retail fuels this year, exacerbated by the introduction of the higher E10 petrol grade in September, Wood Mackenzie downstream oil markets principal analyst Isabelle Gilks told Fastmarkets EnergyCensus.

Biofuel prices have been pretty high – with biodiesel reaching levels two to three times more expensive than diesel, while bioethanol prices were one-and-a-half to two times more expensive than petrol in recent months,” Gilks said, adding that depending on how much the retailers decide to blend into those fuels, “that can also have an impact and push up prices.”

However, Gilks stressed the unpredictability of the past year, highlighting the oil price crash of 2020, adding that “volatility can make it seem like those fuel retailers are taking advantage.”

High prices in 2022 will continue to negatively affect car users, and particularly those on lower incomes, who still rely on the purchase of second-hand vehicles.

“One thing the government could do is lower the taxing duty rates on transport fuels but given current funding issues, they probably won’t,” Mark Williams said, detailing that while the freezing of the tax duty in the October 27 Budget was a help to motorists, “the UK retail sector is meant to be private and competitive.”

Meanwhile, independent consultant at JouleVert Colin Matthews believes petrol prices could start to ease from the second quarter as supply and demand starts to rebalance.

“Obviously going forward, as more people electrify, then demand for oil will drop off globally but we are nowhere near that yet,” Matthews said.

While the UK government in July published plans to ban the sale of new combustion engine vehicles (ICE) from 2035, indicating a shift towards electrification, upfront costs of electric vehicles (EVs) remain high and a deterrent.

“This is a great time to move to an EV but people are still concerned about the upfront costs of getting into an EV and those on lower incomes may be even more dependent on their cars,” Williams said, adding that “they’re therefore in the worst possible position to move to an EV, leaving them stuck between a rock and a hard place.”

Comparing petrol/diesel prices and then how much pence per mile an EV could provide equates to filling a car tank for over £80, Woodmac estimates, which is roughly 12/13p per mile while the equivalent in electric vehicles costs 7.5p per mile, or even less if charging from home.

“Seeing these numbers might get people to look at switching, although the initial upfront cost of an EV is still higher than ICE,” Gilks said, and that comparative overall savings could justify higher upfront costs, especially for those buying more premium cars with access to off street parking.

This article was originally published to Fastmarkets EnergyCensus on Thursday, December 23, 2021.

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