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The effect of fuel prices and fuel tax levels in the UK post 1970

Presented by the Drivers’ Alliance January 2009

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Contents:

1, Introduction

2, Petrol and Diesel prices

3, Fuel taxes

4, Average salaries

5, Distances travelled by car

6, Affordability

7, Effect of fuel prices on distances travelled

8, Summary

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1, Introduction

Getting to work, visiting family and the freedom to travel are all dictated to a large degree by the affordability of driving. Without the freedom to travel when and where desired, the opportunities for work, for play and for social interaction are severely limited.

Public transport cannot provide the flexibility and freedom afforded by a private motor car or motorcycle yet billions of pounds of public money is invested into these private industries. Even with these vast subsidies the fares and cost of using public transport has risen significantly above inflation for many years and continues to do so.

Some have suggested that the real cost of motoring has fallen, but these estimates are based on the falling cost of buying a car. This does not affect motorists’ mobility, which is dependent on the marginal cost.

Concern at the rise in the numbers facing fuel poverty is based on the rising amount – as a portion of their income – it costs vulnerable people to heat their homes, not the amount that a warm home or loft insulation cost in the first place. This report is based on a similar principle and looks at the marginal cost of motoring in relation to average earnings and the effects of fuel prices on car use.

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2, Fuel Prices:

Petrol: This report looks at the price of road fuels from 1970 to 2008. It measures petrol and diesel prices against average wages to find the effect on vehicle use. Price and earnings data is sourced from the Office of National Statistics and DfT. In 1970, the average price for a litre of petrol was £0.072p and the average salary £26.10 per week. For this report, we took an average weekly fuel purchase of 20 litres. In 1970, the weekly cost to fill a car with petrol would be £1.44 which was 5.5% of the average salary. In 2008 the average price for a litre of petrol was £1.09p and the same 20 litres would cost £21.80. The average weekly salary had climbed to £576.80 making the cost of fuel 3.8% of income. The increased cost of petrol from 1970 to 2008 as a comparison with earnings is shown in Fig 1.

Figure 1 – Petrol prices compared to earnings 1970 to 2008

Petrol prices increased at roughly the same rate as average earnings from 1970 to 1981, but average earnings accelerated from 1986 and petrol prices fell in real terms. More recently, petrol prices have increased faster than earnings and the gap is closing.

Figure 2 – Petrol prices compared to earnings 1995 to 2008

The increased cost of petrol on the family budget from 1995 to 2008 can be seen in fig 2. During this period, petrol prices have risen by 91% whilst salaries have seen a much lower increase. Petrol prices have increased in real terms by 20% since 1995. Cont’d...

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More recently from 2002 to 2008 (fig 3), the price of petrol has risen by 47% whilst average earnings increased by just 21.6%. Petrol prices have risen in real terms by 26% in six years. Fig 3 shows the increasing price of petrol from 2002.

Figure 3 – Petrol prices compared to earnings 2002 to 2008

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2002 2003 2004 2005 2006 2007 2008

Average Earnings

Petrol Prices

It should be noted that the price of motor fuels fell in 2001as can be seen in fig 2. This fall followed the fuel price protests in 2000 and a subsequent reduction in taxation. Diesel: Diesel was commonly known as DERV in 1970 and was priced similarly to petrol at £0.07p per litre. As with petrol, a weekly purchase of 20 litres represented 5.5% of earnings. In 1970, diesel was not the fuel of choice for cars as it is today and was mostly used for trucks and heavy equipment. As diesel engine technology improved, it has been widely adopted by car manufacturers as a clean and efficient alternative to petrol. Since diesel has gained popularity, it has risen in price faster than petrol and in 2008 was 9% higher. During 2008 the average price for a litre of diesel was £1.19. The weekly purchase of 20 litres now costs £23.80 but with the average weekly salary at £576.80 running a car on diesel costs 4.12% of earnings. Fig 4 shows the progression of diesel prices against average earnings over the study period. The increased cost of diesel from 1970 to 2008 compared with earnings is shown in fig 4.

Figure 4 – diesel prices compared to earnings 1970 to 2008

Diesel prices increased at roughly the same rate as average earnings from 1970 but in 1981 began to fall in real terms. More recently, the price of diesel has increased faster than earnings and the gap is closing fast

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Cont’d... The price of motor fuels increased rapidly from 1995 (fig 5) and during this period diesel has increased by 120%. In 1995 the average salary was £337.6 and the price of diesel £0.54. In 2008 salaries had increased to £576 and diesel £1.19. In real terms diesel prices have increased by 49%.

Figure 5 – diesel prices compared to earnings 1995 to 2008

More recently from 2002 to 2008 (fig 6), the price has risen by 56% and prices are 35% higher in real terms. The price of diesel is accelerating rapidly away from earnings.

Figure 6 – Diesel price compared to earnings from 2002 to 2008

We should also consider the relationship between diesel and petrol prices. As the use of diesel has increased prices have risen and it is now more significantly more expensive than petrol (fig 7).

Figure 7 – Petrol & diesel price progression from 1970 to 2008

1998 saw the lowest price of diesel compared to petrol when it was 11% lower. Cont’d...

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3, Fuel Taxes: In 1977 fuel tax as a proportion of the price for both petrol and diesel was 50.78%. From 1977 until 2001, the tax levied on diesel and petrol was set individually with diesel being consistently set at a lower rate. From 2001 the tax was set at the same levels on both fuels. The following graph (fig 9) shows how fuel tax duty in pence per litre has progressed during this period.

Figure 8 – Fuel duty on motor fuels from 1997 to 2008 in pence

The tax levied on motor fuels is very high as a percentage of the purchase price. As far as we are aware, no other commodity is subject to such high levels of taxation and indeed, motor fuels are the only product where a tax is paid on a tax. VAT is levied on the fuel tax proportion of the pump price. Taxation as a percentage of the pump price peaked for petrol in 1998 at 87.09% and for diesel in 1999 at 86.28%. The following table (fig 6) shows tax as a proportion of the sales price.

Figure 9 – Tax on motor fuels from 1977 to 2008 as a percentage of price

The tax on motor fuels at the beginning of 2009 is: Petrol: 75.87% Diesel: 68.42% The price for a litre of fuel including VAT but without fuel duty is: Petrol: £0.24p Diesel: £0.36p Government income from motor fuels in 2008 was approx. £30.4 Billion.

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4, Average Salaries:

Mean salaries increased substantially during the study period. In 1977 the average salary for a full time employee (all employees) was £70.20 and in 2008, £576.8, an increase of 821%.

Figure 10 – Earnings compared to salaries 1997 to 2008

The retail price index increased by 519.5% over the same period making the real price of goods and services some 58% lower in real terms. However, petrol prices have increased by 605% and diesel by 661% which means fuel prices have risen substantially above inflation.

Figure 11 – Fuel prices, RPI and earnings from 1977 to 2008. Data from Office National Statistics

Average salaries for all full time employees have risen faster than the Retail Price Index

1 of all items.

Motor fuels have also risen faster than the RPI and the trend is increasing. Petrol is now 16.5% and diesel 27% higher than the long term retail price index. Cont’d...

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5, Distances travelled by car:

The National Travel Survey reveals the average distance travelled by car has increased by only 1.01% since 1995. The increase in distance travelled by car occurred between 1975 and 1995 where the miles increased by 62% from 1,849 to 3,001. From 1995 to 2006 the figures have hardly changed and mileage has only increased by just 1% with the number of miles driven increasing from 3,623 to 3,660. These figures come from the National Travel Survey. The annual sample size is set at 5,796 and comes from private addresses (from the year 2000). The addresses are drawn from the Postcode Address File (a comprehensive list of all delivery points - postal addresses - in Great Britain).

A distinctive feature of the NTS is a travel diary which all sampled household members keep for seven consecutive days. The survey switched to computer assisted interviewing (CAI) in 1994 for the main interview. Respondents continue to complete a paper travel diary which the interviewers then input into a specially written program that checks the data.

Figure 12 – Average distance travelled as a car driver and as a car passenger 1975 to 1994

Figure 13 – Average distance travelled as a car driver and as a car passenger 1995 to 2006

This survey is an actual study of the average miles travelled by people across the country. The data shows no statistically important increase in individual car use for the last 12 years.

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5, Affordability: Motor fuels have become more affordable during the study period as average salaries have increased significantly above inflation. However, fuel prices have increased above the long term retail price index. Prices are now 27% more expensive for diesel and 16.5% more for petrol than would be the case if they had risen in line with the RPI. The price of motor fuels in real terms rose in line with earnings from 1970 to 1981 but began to fall - slowly at first and then accelerating from 1985 when earnings began to rise rapidly. More recently, from 1995, fuel prices began to rise rapidly and although are lower in real terms than 1970, affordability has dropped dramatically from the mid 90’s and the cost of fuel to run a vehicle is now higher by some 20% for petrol and 49% for diesel in real terms.

Figure 14 – Increases in Petrol, Diesel and average earning as a percentage from 1995 to 2008

The graph in figure 13 shows the progression of fuel prices and average earnings from 1995 to 2008.

Figure 15 – Increases in Petrol, Diesel and average earning from 1970 to 1995

The graph in figure 14 shows how the affordability of motor fuels stayed the same until 1985 when prices fell in relation to earnings. However, from 1995 to 2008 prices moved ahead of earnings and motor fuels are now less affordable. Over the longer term, the cost of petrol and diesel has fallen in real terms but more recently the affordability of fuels has fallen with large price increases over the past few years. Cont’d...

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6, Effect of fuel prices on distances travelled: From the early 1970’s the affordability of fuel remained fairly static through to 1985 yet during this period car use increased by 17%. From 1985 to 1995 the increase in miles travelled was a significant 32% while earnings increased by 114% and fuel just 34% making it far more affordable. Between 1995 and 2006 the price of fuel increased in real terms but there is no significant decrease to the number of miles travelled

Figure 16 – The effect of fuel prices on the number of miles driven.

7, Summary:

This report indicates that fuel costs have an effect on car use but that effect is minimal. In the 1970’s the affordability of fuel changed little whilst there was a marked increase in the mileage travelled. However, from 1995 to 2006 fuel became far more expensive in real terms but car use remains fairly static with no significant decrease in use. In contrast, the price of road fuels fell in 2001 with no increase in car use. Fuel tax was uniform for both petrol and diesel at 50.78% in 1977 but has gradually increased until it peaked in the late 1990’s at around 87%. This represents a commodity cost of just £0.13p for every pound spent with £0.87 going directly to the treasury. Taxation levels have fallen back slightly since the peak and as a result of very high oil prices fell to an average of 61.75% in 2008. As oil prices fell towards the end of the year and into 2009, the percentage of tax paid on motor fuels has increased rapidly to an average of 72.14% in January 2009. One key finding shows there has been no increase in the average distance travelled as a car driver or passenger for the past 13 years. Average earnings have increased rapidly since 1970 and are now 22 times higher whilst the price of motor fuels has increased by a factor of 17. However this increased affordability of petrol and diesel has been rapidly eroded since 2002.

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Diesel 1 2 3 4 5 6 7 8

Average Diesel VAT Amount Total Cost Average Miles % tax

Year Diesel Price Duty Rate VAT Tax Diesel Earnings person/year

1970 7 N/A N/A N/A N/A N/A £26.10 N/A N/A

1971 7 N/A N/A N/A N/A N/A £28.70 N/A N/A

1972 7 N/A N/A N/A N/A N/A £32.00 N/A N/A

1973 8 4.95 N/A N/A N/A N/A £36.40 N/A N/A

1974 11 4.95 N/A N/A N/A N/A £41.70 N/A N/A

1975 12 4.95 N/A N/A N/A N/A £54.00 N/A N/A

1976 14 6.60 8.0 1.16 7.76 6.70 £64.20 1849.00 53.64%

1977 18 7.70 8.0 1.44 9.14 8.86 £70.20 1849.00 50.78%

1978 19.00 7.70 8.0 1.52 9.22 9.78 £79.10 N/A 48.53%

1979 24.00 9.20 8.0 1.92 11.12 12.88 £89.60 N/A 46.33%

1980 30.00 10.00 15.0 4.50 14.50 15.50 £110.20 N/A 48.33%

1981 34.00 13.82 15.0 5.10 18.92 15.08 £124.90 N/A 55.65%

1982 36.00 13.25 15.0 5.40 18.65 17.35 £136.50 N/A 51.81%

1983 37.00 13.82 15.0 5.55 19.37 17.63 £148.30 N/A 52.35%

1984 38.00 14.48 15.0 5.70 20.18 17.82 £159.30 N/A 53.11%

1985 42.00 15.15 15.0 6.30 21.45 20.55 £171.00 2271.00 51.07%

1986 36.00 16.39 15.0 5.40 21.79 14.21 £184.70 2271.00 60.53%

1987 35.00 16.39 15.0 5.25 21.64 13.36 £198.90 61.83%

1988 34.00 17.29 15.0 5.10 22.39 11.61 £218.40 65.85%

1989 36.00 17.29 15.0 5.40 22.69 13.31 £239.70 2891.00 63.03%

1990 41.00 19.02 15.0 6.15 25.17 15.83 £263.10 2891.00 61.39%

1991 44.00 21.87 17.5 7.70 29.57 14.43 £284.70 67.20%

1992 45.00 22.85 17.5 7.88 30.73 14.28 £304.80 3001.00 68.28%

1993 49.00 25.14 17.5 8.58 33.72 15.29 £317.30 3001.00 68.81%

1994 51.00 30.44 17.5 8.93 39.37 11.64 £325.70 3001.00 77.19%

1995 54.00 31.32 17.5 9.45 40.77 13.23 £337.60 3623.00 75.50%

1996 57.00 36.86 17.5 9.98 46.84 10.17 £351.60 3623.00 82.17%

1997 63.00 40.28 17.5 11.03 51.31 11.70 £373.90 3623.00 81.44%

1998 66.00 44.99 17.5 11.55 56.54 9.46 £393.90 3725.00 85.67%

1999 73.00 50.21 17.5 12.78 62.99 10.02 £409.20 3725.00 86.28%

2000 82.00 51.82 17.5 14.35 66.17 15.83 £426.70 3725.00 80.70%

2001 78.00 45.82 17.5 13.65 59.47 18.53 £451.70 3725.00 76.24%

2002 76.00 45.82 17.5 13.30 59.12 16.88 £474.30 3661.00 77.79%

2003 78.00 45.82 17.5 13.65 59.47 18.53 £489.20 3660.00 76.24%

2004 82.00 47.10 17.5 14.35 61.45 20.55 £508.20 3674.00 74.94%

2005 90.00 47.10 17.5 15.75 62.85 27.15 £518.20 3682.00 69.83%

2006 95.00 47.10 17.5 16.63 63.73 31.28 £539.30 3660.00 67.08%

2007 97.00 50.35 17.5 16.98 67.33 29.68 £552.60 N/A 69.41%

2008 119.00 50.35 17.5 20.83 71.18 47.83 £576.80 N/A 59.81%

2009 98.00 52.35 15.0 14.70 67.05 30.95 N/A N/A 68.42%

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Petrol 1 2 3 4 5 6 7 8

Average Petrol VAT Amount Total Cost Average Miles % tax

Year Petrol Price Duty Rate VAT Tax Petrol Earnings person/year

1970 7 N/A N/A N/A N/A N/A £26.10 N/A N/A

1971 7 N/A N/A N/A N/A N/A £28.70 N/A N/A

1972 7 N/A N/A N/A N/A N/A £32.00 N/A N/A

1973 8 4.95 N/A N/A N/A N/A £36.40 N/A N/A

1974 11 4.95 N/A N/A N/A N/A £41.70 N/A N/A

1975 16 4.95 N/A N/A N/A N/A £54.00 N/A N/A

1976 17 6.6 8.0 1.35 7.95 8.89 £64.20 1,849 47.19%

1977 18 7.7 8.0 1.44 9.14 8.86 £70.20 1,849 50.78%

1978 17 6.6 8.0 1.36 7.96 9.04 £79.10 N/A 46.82%

1979 23 8.1 8.0 1.84 9.94 13.06 £89.60 N/A 43.22%

1980 28 10 15.0 4.20 14.20 13.80 £110.20 N/A 50.71%

1981 34 13.82 15.0 5.10 18.92 15.08 £124.90 N/A 55.65%

1982 37 15.54 15.0 5.55 21.09 15.91 £136.50 N/A 57.00%

1983 39 16.3 15.0 5.85 22.15 16.85 £148.30 N/A 56.79%

1984 41 17.16 15.0 6.15 23.31 17.69 £159.30 N/A 56.85%

1985 43 17.94 15.0 6.45 24.39 18.61 £171.00 2,271 56.72%

1986 38 19.38 15.0 5.70 25.08 12.92 £184.70 2,271 66.00%

1987 38 19.38 15.0 5.70 25.08 12.92 £198.90 N/A 66.00%

1988 38 19.43 15.0 5.70 25.13 12.87 £218.40 N/A 66.13%

1989 40 19.08 15.0 6.00 25.08 14.92 £239.70 2,891 62.70%

1990 44 20.985 15.0 6.60 27.59 16.42 £263.10 2,891 62.69%

1991 47 24.13 17.5 8.23 32.36 14.65 £284.70 N/A 68.84%

1992 48 25.605 17.5 8.40 34.01 14.00 £304.80 3,001 70.84%

1993 52 28.17 17.5 9.10 37.27 14.73 £317.30 3,001 71.67%

1994 54 32.85 17.5 9.45 42.30 11.70 £325.70 3,001 78.33%

1995 57 33.73 17.5 9.98 43.71 13.30 £337.60 3,623 76.68%

1996 59 39.27 17.5 10.33 49.60 9.41 £351.60 3,623 84.06%

1997 64 42.69 17.5 11.20 53.89 10.11 £373.90 3,623 84.20%

1998 67 46.625 17.5 11.73 58.35 8.65 £393.90 3,725 87.09%

1999 72 50.045 17.5 12.60 62.65 9.36 £409.20 3,725 87.01%

2000 81 48.82 17.5 14.18 63.00 18.01 £426.70 3,725 77.77%

2001 76 45.82 17.5 13.30 59.12 16.88 £451.70 3,725 77.79%

2002 74 45.82 17.5 12.95 58.77 15.23 £474.30 3,661 79.42%

2003 76 45.82 17.5 13.30 59.12 16.88 £489.20 3,660 77.79%

2004 80 47.1 17.5 14.00 61.10 18.90 £508.20 3,674 76.38%

2005 87 47.1 17.5 15.23 62.33 24.68 £518.20 3,682 71.64%

2006 91 47.1 17.5 15.93 63.03 27.98 £539.30 3,660 69.26%

2007 94 50.35 17.5 16.45 66.80 27.20 £552.60 N/A 71.06%

2008 109 50.35 17.5 19.08 69.43 39.58 £576.80 N/A 63.69%

2009 86 52.35 15.0 12.90 65.25 20.75 N/A N/A 75.87%

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References:

1, RPI 1949 to 2007 TZ258185440 from Office of National Statistics.

2, Transport Statistics Great Britain 2008 edition.

3, Information request to DfT and data sourced from National Travel Survey.