Rural Fuel Prices

There is a real issue with the price of fuel – petrol and diesel - in the Highlands. The combination of distance and lack of public transport alternatives means many people in rural areas have no choice but to travel by car. In principle, I support the raising of fuel duty as one way of discouraging unnecessary car journeys but many people in rural and remote areas have little alternative but to continue to use their cars. Combined with lower average incomes, this creates an issue similar to fuel poverty for domestic heating bills.

A government committed to fairness for all needs to tackle this issue. The question is how.

Fuel prices in rural areas vary widely, from around the national average to more than 10p per litre above. Despite what the oil industry says, this variation does not seem to be about extra transport costs; it seems to be about local market practice and trading volumes (Scottish Exec Report, 2001)

Small rural garages do not have the volume, so they need to charge a higher margin per litre to cover their fixed costs. Large retailers (mainly the supermarkets like Tescos and Morrisons) exploit this to charge as high a premium as their local market will bear, hence the variation between supermarket pump prices in different part of the highlands, despite their economies of scale and ability to share costs around their national networks.

The LibDems make much of their proposals to tackle these issues through a Rural Fuel Duty Reduction which would seek to reduce pump prices in defined areas by up to 3p per litre. It would require the UK government to seek a derogation under EU law. This has indeed been done by the governments of France, Greece and Portugal but ONLY for island communities (Corsica, the Peleponese and the Azores respectively).

In practice, however, for other than clearly defined island communities, the practicalities of working out what constitutes a “remote” community for the purpose of such changes in fuel duty seem impossibly complex in most parts of the UK.

The Scottish Government does use an 8-point “urban-rural” classification system that could form the basis for this. The problem is the when you map out the areas that would be defined as the most remote/rural there is little correlation with the most extreme differences in fuel prices. For example, the borders of one "very remote" region pass within 5 miles of Fort William, where current prices are only 1.1p a litre above the UK average, and within 5 miles of Oban, where current prices are only 2.1p a litre above the average.

A fuel duty reduction could lead to unpredicted market consequences (Tesco setting up over the “border” of a rural area but which is still close to a major centre like Fort William or Inverness). It could also give rise to perceived unfairness in UK tax regime between different parts of the country (should holiday home owners in rural Cornwall, for example, also benefit from such a regime?). Without very strict regulation, there may be little actual change in pump prices at rural filing stations as reduced costs are absorbed into margin or used to cover additional administration costs

So if a Rural Fuel Duty Reduction is not the answer, what is?