The UK’s petrol price crisis: why the Iran war premium is back – and who pays the price

Why the Iran war premium is back – and why it’s different this time

The last time UK petrol prices averaged 160p a litre, Iranian Revolutionary Guard speedboats were harassing oil tankers in the Strait of Hormuz, and the UK government had just seized an Iranian supertanker off Gibraltar. That was July 2019. Seven years later, the Strait is quiet, the ceasefire holds, and yet the price at the pump has returned to those wartime levels. The RAC’s latest fuel watch, published on 30 July, shows unleaded at 160.1p and diesel at 179p – a 14.5p jump in a fortnight. The question is not whether drivers are paying more; it is why they are paying a war premium when the war is over.

The answer lies in the anatomy of the oil market, not in the headlines. The ceasefire in the Middle East, announced on 10 July, did trigger a 9p fall in wholesale prices. But that relief was swallowed by three countervailing forces: a 10% rally in Brent crude since 19 July, a 5p-per-litre increase in refining margins, and a 2p rise in fuel duty that took effect on 1 August. The first is geopolitical; the second is structural; the third is political. Together, they explain why the UK is now the only G7 country where petrol prices are higher than they were at the peak of the Iran crisis.

The geopolitical premium: why the ceasefire changed nothing

On paper, the ceasefire should have cut the risk premium. Iranian exports, which had been sanctioned at 1.2 million barrels per day, are now flowing freely. The US Energy Information Administration estimates that Iranian output has risen by 300,000 barrels per day since the truce. Yet Brent crude, the global benchmark, has climbed from $82 to $88 in the past ten days. The reason is not supply; it is insurance.

The Joint War Committee, a London-based body that advises marine insurers, has kept the Persian Gulf on its “high-risk area” list. Tankers still pay a $500,000 war-risk surcharge to transit the Strait of Hormuz, and that cost is passed on to refiners, then to retailers, then to drivers. The surcharge is not new, but its persistence is. Before the ceasefire, the market priced in a 50% chance that the surcharge would be lifted within three months. Now, traders have pushed that probability to 20%. The result is a $3-per-barrel premium that shows no sign of fading.

The UK is particularly exposed. Unlike France or Germany, which rely on pipelines from Russia and Norway, the UK imports 80% of its refined petrol from refineries in the Netherlands and Belgium – both of which source crude from the Gulf. When the war-risk surcharge rises, UK forecourts feel it first.

The refining squeeze: why diesel is the real crisis

While unleaded prices have grabbed headlines, the diesel market is where the pain is sharpest. Diesel is now 19p a litre more expensive than unleaded – the widest gap since 2015. The reason is simple: Europe has lost 1.2 million barrels per day of refining capacity since 2022.

The closures are structural. The TotalEnergies refinery in Grandpuits, France, shut in 2021. Shell’s Pernis plant in the Netherlands, once Europe’s largest, is running at 60% capacity. The UK’s own Coryton refinery closed in 2012, and the Stanlow plant in Cheshire is now the only major refinery left in England. When demand spikes – as it has this summer, with hauliers stockpiling ahead of potential strikes – the system cannot respond. The result is a diesel shortage that has pushed wholesale prices to $105 a barrel, $12 above Brent.

The UK is doubly vulnerable. Not only does it import most of its diesel, but it also taxes it more heavily. Diesel carries a 57.95p-per-litre fuel duty, compared with 52.95p for unleaded. When wholesale prices rise, the tax bite becomes proportionally larger. The RAC estimates that 60% of the price at the pump for diesel is now tax – up from 50% in 2019.

The political time bomb: why the 1 August duty rise went unnoticed

On 1 August, fuel duty rose by 2p a litre. The increase was not a surprise; it was the annual inflation-linked adjustment, frozen since 2011 but reinstated in last November’s Autumn Statement. What was surprising was the timing. The government chose to implement the rise during the peak of the summer driving season, when prices were already at record highs.

The decision was not accidental. The Treasury’s own modelling, leaked to The Guardian in June, predicted that the duty rise would add £1.1 billion to tax receipts in 2026-27. With public finances under strain, the chancellor, Rachel Reeves, faced a choice: delay the rise and forgo revenue, or proceed and risk a backlash. She chose the latter.

The political calculation is clear. Fuel duty is unpopular, but it is also invisible. Most drivers do not know that duty makes up 35% of the price of petrol. When prices rise, they blame the oil companies, not the Treasury. The government is betting that the anger will dissipate before the next election – and that the revenue will help fund the £22 billion hole in the public finances identified by the Office for Budget Responsibility.

Who wins, who loses: the new energy divide

The petrol price crisis is not felt equally. The winners are few, but they are powerful.

1. The Treasury: Every 1p rise in fuel duty brings in £470 million a year. At 160p a litre, the government is collecting £57 billion in fuel taxes – £10 billion more than in 2019.
2. Oil majors: BP and Shell reported combined profits of £32 billion in 2025. Their UK refining margins have doubled since 2022, from 15p to 30p a litre.
3. Insurers: The war-risk surcharge is pure profit. Lloyd’s of London, which underwrites most of the Gulf’s marine insurance, saw its first-half profits rise by 40% in 2026.

The losers are more numerous – and more visible.

1. Hauliers: The Road Haulage Association estimates that the diesel price rise has added £1.2 billion to industry costs since January. Small operators, which make up 80% of the sector, are the hardest hit.
2. Rural drivers: In areas with no public transport, car dependency is not a choice. The RAC’s latest survey shows that 18% of rural households have cut back on essential trips – doctor’s appointments, school runs – because of fuel costs.
3. Low-income households: The poorest 20% of households spend 12% of their income on transport, compared with 4% for the richest 20%. For them, the petrol price rise is not an inconvenience; it is a crisis.

The October Budget: what to watch for

Rachel Reeves’ first Budget, scheduled for 28 October, will be the first test of the government’s response to the crisis. Three measures are under discussion:

1. A temporary cut in fuel duty: The Treasury is considering a 5p-per-litre reduction, costing £2.3 billion a year. The problem is timing. A cut now would be seen as a U-turn, and the OBR has warned that it could fuel inflation.
2. A windfall tax on refiners: Labour has pledged to close the “loophole” that allows oil companies to offset decommissioning costs against tax. The measure could raise £1.5 billion, but it risks pushing refiners to relocate.
3. A rural fuel rebate: The government is exploring a scheme to cap prices at 150p a litre in remote areas. The model is the Scottish islands, where a similar rebate has been in place since 2015.

None of these measures will solve the underlying problem: the UK’s dependence on imported refined fuel. The real solution – a return to domestic refining – is years away. The Stanlow refinery is expanding, but its new hydrocracker will not come online until 2028. Until then, the UK will remain at the mercy of global markets – and the war premium will stay on the pump.