English Gas Prices

Stupid Question ™
June 21, 2004
By John Ruch
© 2004

Q: Why is gas so expensive in England?
—Petrol Huffer, Chicago, Illinois


A: Despite the recent whining about the cost of refueling our national SUV fleet, gas is a lot more expensive just about everywhere else than in the U.S.
The reason it’s more expensive everywhere else is high tax rates—the kind of taxes most environmentalists think the U.S. should have to curb its beastly oil appetite and resultant pollution plague.

But U.K. gas is notoriously expensive, even by international standards. The main reason is its even beefier tax system.

A week ago, the U.K.’s average gas price for basic unleaded was 82.15 pence per liter, according to the British Automobile Association (which is, incidentally, owned by a giant energy conglomerate). That’s about $5.65 per gallon.

For direct comparison, April data for all of Europe shows that’s the same price as the continent’s highest for the month, which was the Netherlands. The cheapest was Poland, at about $3.52 per gallon. At the same time, the U.S. averaged $1.78 per gallon. (For further contrast, the cheapest milk at my local supermarket right now is $3.75 per gallon.)

Roughly 75 percent (depending on grade) of U.K. gas price is taxes. That’s about $4 out of the $5.65 per gallon price of a week ago.

The biggest chunk of that (60 percent) is, or at least was originally intended as, a punitive tax to discourage driving—just like cigarette taxes. (Unlike the U.S., the U.K. has signed onto treaties pledging to reduce production of greenhouse gases.) The taxes also include a sales tax and a “value-added tax,” a tax levied on a product at each stage of “value” added to it, as in oil refining.

The U.K. gas tax is pretty much in line with the rest of Europe, where taxes typically make up 50 to 80 percent of the price. By contrast, about 30 percent of the U.S. gas price is tax.

But U.K. gas is still, on average, the most expensive in Europe. One reason is because the government regularly hikes the tax rate to keep up with—in fact, to outpace—inflation.

The U.K. has had a gas tax since the 1920s, when automobiles became popular on a large scale. But the real price squeeze began about a decade ago, when the government established the “fuel tax escalator”—an automatic rise in the gas excise tax amounting to about 3-5 percent per year. The purpose was to discourage driving and lower pollution.

Under Prime Minister Tony Blair, the government has ditched the escalator in recent years, but has gone on raising the tax rate anyway.

However, the recently sky-rocketing gas prices gave the government pause. A 1.9-pence per liter rise due this year has already been delayed until September, and may not go through if gas prices aren’t lower by August, government officials promise.

That’s a good reminder that taxes aren’t the only element of gas prices, and not the cause of the recent price spike. Most economists attribute that to increasing Asian (especially Chinese) demand and the limited production capacity of the OPEC countries. The Iraq war doesn’t appear to be helping, either. (Warning: Oil prices are never simple; for example, the U.K.’s import price is pegged to North Sea crude prices as a benchmark.)

While the British and Irish tend to be much more environmentally conscious than Americans, the high gas prices are certainly controversial. There’s already been at least one price protest in the U.K. this year, in Scotland.

For one thing, there’s no consensus on how much high gas taxes have reduced driving, pollution and traffic congestion. The only absolutely clear result has been a major rise in the popularity of cars that use diesel fuel, which is generally cheaper and is in some ways less polluting. (However, in May in the U.K., it was more expensive than regular gas.)

For another thing, the gas tax money doesn’t go directly to public transportation, anti-pollution measures, or other visible trade-off programs. It just goes into general government funds. And it is extremely profitable—knocking even a penny off the tax would cost the government hundreds of millions of dollars a year.

In fact, these days Blair talks more about the social programs the gas taxes fund than the environmental benefits.