Whenever oil makes the news, drivers start watching the forecourt. With tensions around the Strait of Hormuz keeping crude prices elevated this autumn, many people want to know how quickly a move in oil shows up at the pump, and why petrol prices sometimes seem to rise fast and fall slowly. The link is real, but it is less direct than most people think.
Crude oil is only part of the price
Petrol is made from crude oil, but the price you pay at a UK filling station is built from several pieces. The first is the cost of the fuel itself, which depends on the wholesale price of refined petrol rather than crude oil directly. Then come the costs of transporting, storing and selling it, plus the retailer’s margin.
On top of that sit two taxes. Fuel duty is a fixed amount charged on every litre, regardless of the price of oil. VAT at 20% is then charged on the total, including the duty. Because fuel duty does not move with oil, a large share of the pump price stays the same even when crude swings sharply. That is why a big percentage move in oil usually produces a much smaller percentage move at the pump.
From crude to refined fuel
Refineries turn crude into products such as petrol, diesel and jet fuel. The difference between the price of crude and the price of those products is the refining margin. When refineries are stretched, or when there are outages or supply problems, that margin can widen, pushing up fuel prices even if crude itself has not moved much. Energy companies have pointed to stronger refining margins in their recent quarterly updates, which shows how much this middle step can matter.
Why the pound matters
Oil and wholesale fuel are priced in US dollars. For a UK buyer, the exchange rate between the pound and the dollar makes a difference. If sterling weakens against the dollar, fuel becomes more expensive in pounds even if the dollar price of oil is unchanged. Our explainer on how dollar strength hits commodity prices covers this effect.
Why the timing lags
Retailers buy fuel in advance and hold it in storage, so the price at the pump reflects fuel bought days or weeks earlier. When wholesale prices rise, retailers may raise pump prices quickly to protect margins on future deliveries. When wholesale prices fall, the cuts often come through more slowly. Economists sometimes describe this pattern as prices rising like a rocket and falling like a feather, and it has been the subject of scrutiny by UK competition authorities in recent years.
Competition between local stations also matters. Prices can vary between areas depending on how many forecourts are nearby and how hard they compete.
The Hormuz connection
A large share of the world’s seaborne oil passes through the Strait of Hormuz. When shipping there is disrupted or threatened, traders demand a higher price to account for the risk of lost supply. Our guide to the Strait of Hormuz explains why this narrow waterway carries so much weight. That risk premium can lift both crude and refined fuel prices, and eventually feeds through to forecourts.
Why it matters beyond the pump
Fuel costs matter for inflation. Petrol and diesel are part of the consumer price index, and higher transport costs feed into the price of almost everything that is delivered by road. Our piece on how oil shocks transmit into inflation traces that chain. For the Bank of England, a sustained rise in fuel prices can make inflation harder to bring down, which affects interest rate expectations, gilt yields and sterling.
The takeaway
Oil prices feed into UK petrol prices through wholesale fuel costs, refining margins and the exchange rate, with a fixed layer of duty and VAT on top. The pass-through is real but diluted and delayed. For traders, the same chain links an oil headline to inflation, rates and the pound.
If you want to see how well you understand the way energy moves through markets, our free trader assessment can show you where to focus your learning next.
