Fuel price update

Petrol-diesel price gap shrinks 90%

6 July 2009

Motorists spurred to switch from petrol to diesel cars because the pump price difference is currently shrinking should think long and hard before doing so, warns the AA. That is unless their old car is eligible for a car scrappage scheme grant.

The difference in price between a litre of petrol and more expensive diesel has now shrunk to 1.49 pence, 89% down from the record high of 13.85 pence at the end of July last year.

With diesel-engined cars getting 15-20% more miles per gallon than most petrol equivalents, a new car that is on average now saving its driver 2.5p a mile looks a sound investment.

Break-even mileage

However, a diesel car often costs around £1000 more than a petrol one and breaking even can come after 40,000 miles. Last July, when the average saving was 1.38 pence a mile, this break-even point came after 72,464 miles.

The AA urges buyers to learn from recent history. An early warm spring in 2007 caught US fuel suppliers stocked with diesel and the resulting surge in demand for petrol, from the premature start of the driving season pushed global wholesale prices up to diesel levels. With UK petrol and diesel pump prices level-pegging for the first time since 2001, many car owners decided to join the "dash for diesel".

But, by December 2007, the fuel price difference had risen to 5 pence, before rising to more than 13 pence last summer - potentially adding more than three year's mileage to the break-even point of the average driver. The AA and Internet forums were inundated with complaints from owners, newly converted to diesel, whose financial plans had come off the road.

Diesel glut

The current closing of the price gap results from a glut of diesel, caused by recession-hit industrial and transport demand, restraining price increases while petrol prices have soared in recent months. Once the global economy begins to recover, demand for diesel will pick up and the price difference will open up again. Additionally, extra demand for diesel, from car populations in east Europe and elsewhere switching to meet CO2-reduction targets, will aggravate the difference, particularly when the UK doesn't produce enough.

This year, however, owners of cars aged 10 years or older can scrap their vehicle and use the £2000 car scrappage scheme grant to wipe out the extra cost of buying most new diesel cars – giving them immediate savings from diesel's better fuel consumption.

AA advice

"The AA advises anyone considering a switch from a petrol to a diesel car to do their sums carefully and not bank on the current fuel price difference lasting long term. The big gamble is on how long the recession lasts, whether or not global demand for diesel remains depressed," says Edmund King, the AA's president.

"Potential buyers, we think, should reckon on a potential petrol-diesel price difference of around 10 pence a litre to reduce the impact should the 2007-8 experience repeat itself. Cars that average less than 15,000 miles a year are unlikely to recoup the initial extra cost of a new diesel car within their first three years and may not make sound investments for owners who habitually change their cars before the first MoT test.

"However, the Government's scrappage scheme offers less well-off new car buyers a limited but unprecedented opportunity to buy into diesel technology and fuel efficiency without having to worry about the additional start-up cost."

factfile

Fuel consumption for a newer petrol car averages 7.04 miles per litre (32 mpg) and for a newer diesel 8.58 (39mpg), according to DfT figures. Latest UK average fuel prices are 103.88 for petrol and 105.37 for diesel, respectively 14.76 and 12.28 pence per mile. With a diesel car costing around a £1000 more, the 2.48 pence per mile saving recoups that cost after 40,323 miles.

On 28 July 2008, when petrol cost 117.2 pence per litre and diesel 131.05, creating a difference of 13.85 pence per litre, costs per mile were respectively 16.65 and 15.27 pence. The 1.38 pence per mile saving recouped the initial £1000 cost after 72,464 miles.

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6 July 2009