Why is diesel so expensive and could it really hit £3 a litre in the near future?

Diesel has hit a record high, with it currently sitting just shy of £2 a litre, leaving markets worried and motorists struggling to afford to fill up their vehicles.

Diesel also remains important for thousands of small businesses that rely on commercial vans, haulage, and heavy machinery.

Since the Iran conflict broke out at the end of February, fuel prices have become volatile, with diesel in particular soaring at the pumps.

Diesel is more expensive than petrol due to numerous reasons, mainly its refining process, environmental rules, low yields and wide industrial global demand, but now its sensitivity to geopolitics has made it far more expensive than unleaded.

Over the weekend, President Trump hinted that he may ban US exports of diesel which sent Brent Crude soaring to $108 a barrel. It has fallen back slightly this morning to $105. 

In response, diesel has surged to the highest price in British history – and it could get even worse: The RAC has warned that diesel may soon reach £3 a litre.

In light of this challenging news for drivers, we've looked into why diesel is more expensive, why the Iran conflict has pushed prices far higher than petrol, and whether it still makes financial sense to run your diesel car instead of a petrol one if diesel prices keep pushing up.

Diesel has reached a historic high, with it currently sitting just shy of £2 a litre. Why is diesel so much more expensive than petrol, why are diesel prices rising and how high can they go? 

Why is diesel so expensive and how high could it go? 

There are a combination of factors that make diesel more expensive than petrol, from chemistry to geopolitics.

Most of the price gap between diesel and petrol is formed before tax, with refinery, fuel trade prices and supply all playing a part.

The first factor falls under costs of production: diesel refining is more expensive than petrol refining.

Despite both being made from crude oil, diesel and petrol have different chemical makeups. And diesel is much more complex in formulation than petrol.

Diesel is heavier and has a longer chain of hydrocarbons – organic compounds made of hydrogen and carbon atoms – and as a result, its refinery process is more intense.

Contaminants including metals such as nickel and vanadium, which can damage engines, and sulfur, which can be poisonous to people, need to be removed in line with environmental regulations – such as producing Ultra-Low Sulphur Diesel – also contributing to a higher refining cost.

And because so much matter is removed during the process, less diesel is produced per barrel of oil than petrol, also making it more expensive.

Secondly, diesel is subject to demand from not only cars but public transportation vehicles, delivery trucks, agricultural machines, boats, machinery and generators – its use is much more widespread than petrol.

Demand for diesel also rises as we approach colder months as the fuel oil used for home heating is made from the same basic components as diesel fuel, so winter demand for heating oil tends to increase diesel retail prices.

And thirdly, and most topically, diesel is also more vulnerable to geopolitics as most countries, in particular the UK, are heavily reliant on diesel imports, producing less domestically than they consume. 

Therefore diesel prices are extremely sensitive to international supply chain disruptions and conflicts.

What has happened to fuel prices since the Iran conflict? 

The Iran conflict has pushed up prices at the pumps massively.

Similar to when Russia invaded Ukraine, the Iran conflict sent pump prices soaring initially.

When the conflict first broke out petrol was at 132.8p a litre and diesel at 142.4p a litre. 

Quickly prices climbed with diesel recording 191.5p per litre on April 15, and petrol 158.3p per litre.

But prices fell back when the US and Iran agreed to a framework deal to end the fighting in June.

During June, diesel prices plunged by almost 17p a litre – the most significant decline in the cost to fill up between the start and the end of the same month since records began in 2000.

However since tensions between the two countries rose again, prices have continued to push north.

Diesel has now hit an all-time high, with the average price in Britain now at almost £2 a litre. Many forecourts are already more than that.

Forecourts are regularly showing diesel prices over £2 a litre now

Simon Williams, head of policy at RAC, said: 'The average price of a litre of diesel has now reached the highest level in UK history at 199.18p, in what will be a financial blow to households and businesses that use their vehicles regularly.

'The cost of filling up an average family car is now almost £110, £31 more than it was at the start of the US-Iran conflict.

'Petrol prices, too, are continuing to rise. A litre of unleaded stands at 174.13p on average, 41p more than at the start of the war – taking the cost of a full tank to nearly £96.'

Within the first 100 days of conflict, the Energy & Climate Intelligence Unit estimates that petrol and diesel vehicles have collectively incurred approximately £1.7billion in extra running costs over the 100-day period.

Why has diesel got so much more expensive?

The UK only produces about half the diesel we need – and therefore we are heavily reliant on imports. Petrol on the other hand, we make enough of to cover domestic demand.

This is why we're now seeing the price of diesel far outreach petrol in Britain.

We're competing for imports at a high price as global demand outstrips supply and we're at the mercy of international shipping costs.

Essentially it's a perfect import storm.

How high could the price go? 

The RAC has warned that prices have entered 'new uncharted territory' with experts fearing that drivers could be faced with paying £3 a litre for diesel.

Diesel is facing its own challenges that could send its prices even higher.

Simon Williams says: 'With concerns over the global supply of wholesale diesel, the question facing drivers is "how far above £2 a litre will it climb?".

'Only a sudden and sustained drop in the cost of oil can prevent an average diesel pump price of over £2 a litre happening, which sadly appears highly unlikely.'

What's causing the concern at this moment is the availability of diesel: Demand is high internationally, and yet limited refining capacity can't be increased quickly to cover the gap in supply that was previously filled by Saudi Arabia and Kuwait.

Russia banned exports of diesel in the summer, further reducing the supply to Europe and the UK – before its invasion of Ukraine, Russia was the largest UK supplier.

President Trump is looking 'very seriously' at restricting exports has been the final nail in the coffin for diesel prices in the UK 

Now, news that President Trump is looking 'very seriously' at restricting exports has been the final nail in the coffin for diesel prices in the UK.

The US is responsible now for around a third of UK diesel imports, picking up the slack from Russia.

As the President tries to keep costs for Americans down and shore up support ahead of November's midterm elections, the markets have wobbled and the pumps have spoken.

If the US does indeed put a ban on diesel exports then it is very possible that diesel climbs even further, and fast.

Is it still cheaper to run a diesel car that does better MPG than a petrol one? 

Diesel cars are known for delivering better fuel economy than petrol equivalents, but the price gap between diesel and petrol today means that this traditional cost-running advantage is being heavily eroded.

Diesel drivers will pay £435 more on average to fill up their cars over a normal 8,000-mile year of driving if the cost of diesel rises to £2 per litre compared to the outbreak of the Iran conflict, new analysis from What Car? has found.

To see how diesel versus petrol stacks up, we've looked at a couple of popular diesel cars to see whether the higher mpg of a diesel car still outweighs the cheaper pump price of its petrol equivalent.

With diesel at 199.18p per litre and petrol at 174.13p per litre, we've worked out how much it costs for each car to cover 8,000 miles annually with their given mpg figures.

An Audi A5 2.0 TDI 204PS (57.6mpg) will now cost its owner £1,258 to drive 8,000 miles a year. A petrol A5 TFSI 204PS (41.7mpg) is still more expensive to run over that same mileage, costing an owner £1,519 a year

An Audi A5 2.0 TDI 204PS with a combined 57.6mpg will now cost its owner £1,258 to drive 8,000 miles a year.

However, its less efficient petrol A5 TFSI 204PS counterpart, which only does 41.7mpg, is still more expensive to run over that same mileage, costing an owner £1,519 a year.

A seven-seater Skoda Kodiaq L&K 2.0 TDI 193PS with an mpg of 44.1 will cost its owner £1,642 a year in diesel costs, while the Skoda Kodiaq L&K 2.0 TSI 204PS (35.8mpg) will cost £1,769 in petrol costs.

While the difference is less when the mpg figures are closer together, diesel owners are still making a saving compared to petrol drivers - but this may mean little when you're paying more than £400 extra a year for your diesel car anyway.

How much of the pump price is tax?

Currently, fuel duty sits at 52.95p a litre for both unleaded and diesel.

VAT of 20 per cent is also slapped on top, which accounts for roughly 33.2p a litre. It means around 86p a litre of diesel is tax which goes to the Treasury.

However, as a percentage, the tax figure has fallen as diesel prices have risen, making up roughly 43 per cent of the total.

When diesel was at 142.2p a litre in February, the percentage was more like 54 per cent – fuel duty still at 52.95p a litre, and VAT at 23.7p – or around 76p.