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.

Gas Prices Set At One-Tenth Of A Cent

Stupid Question ™
Oct. 1, 1998
By John Ruch
© 1998

Q: Why do gasoline prices end in a tenth of a cent?
—E.L.


A: Crude oil sells by the barrel at a normal dollars-and-cents price. Divide that price by the 42 gallons a barrel, and your dollar-per-gallon price is usually a lengthy fraction. If a barrel sells at $22, that means it’s about 52.38095 cents per gallon.

The sane thing would be to round that to 52 cents. But oil companies don’t. Gas stations have to buy gasoline from them at prices marked to the tenth (and frequently the hundredth) of a cent per gallon. (Even federal gas tax is pinpointed at 18.4 cents per gallon.)

Why? Because oil is a tightly controlled commodity with a slim profit margin. Super-precise pricing lets oil companies strictly define and fine-tune the value of gas. That’s important to them, because they deal in quantities big enough for a tenth (or hundredth) of a cent to matter.

Gas stations seem to be in the same numbers game, with modern pumps computing prices at least to the tenth of a cent (then rounding up for your final bill), andw with profit margins still slim. Westerville, Ohio gas station owner John Price says he makes 6 to 7 cents a gallon—the same profit his dad made pumping gas in the ’50s.

But something funny happens here. Not only do gas stations set prices to a tenth of a cent; they always set it to nine-tenths of a cent.

The web site for the American Petroleum Institute (API), an oil industry group, says that independent gas stations in the 1930s started pricing gas in fractions—sometimes ending in a half-cent, often nine-tenths of a cent—to “emphasize the discount” they offered. It’s since passed into near-unconscious tradition.

Such price-shaving is common marketing practice to make consumers think they’re getting something cheaper than it is; witness the prevalence of “$19.99.” The API explanation makes sense, especially considering that ’30s prices would have been mere cents per gallon (25.9 cents per gallon reads better than today’s bulky 1.07.9 cents per gallon).

The oil companies are happy to tell you how gas stations stiff you and trick you this way. They’re not so willing to explain how they themselves use the crazy decimal system to tweak prices for their own benefit and force stations to buy gas at insanely complicated and unpredictable prices.

Ask the companies about their own tenths-of-a-cent pricing, and they either shut up or go nuts.

“We’re bound by regulations and we can’t really address this issue,” Exxon told me. An API spokesperson said it’s because of a former government taxing system whose details she couldn’t specify; she got so flustered she even turned the web site info on its ear and said the nine-tenths pump price is “not a marketing thing at all.”