Motorists across the UK frequently encounter frustrating price discrepancies at the pump. Petrol prices vary dramatically even between stations on the same road. Differences of five pence per litre are common, despite the product being identical. This variation creates a “postcode lottery” for drivers. The transparency of forecourt pricing only highlights the inconsistency. Understanding the reasons requires examining wholesale costs, local competition, and retailer strategies.

Several factors explain why petrol prices vary so much. Wholesale fuel costs change daily, influenced by global oil prices and currency exchange rates. However, these costs constitute less than a quarter of the final pump price. The majority is tax—VAT and fuel duty account for 56%. Retailer operating costs and profit margins make up the remainder. Crucially, major chains often set prices locally rather than nationally. This leads to significant differences between towns just miles apart.

The Role of Wholesale Costs and Retailer Purchasing

The base cost of petrol is never static. Wholesale prices fluctuate with the global oil market and the pound-to-dollar exchange rate. Consequently, the timing of a retailer’s purchase affects its pricing. Smaller, independent stations can sometimes undercut larger rivals. They are more nimble, allowing them to buy fuel when wholesale prices dip temporarily. Bigger chains may have bulk purchase advantages, but this saving is often minimal compared to other factors.

Therefore, the price you pay reflects when the station last bought its supply. This system creates inherent variability. Additionally, retailers have different contracts with suppliers, further influencing their cost base. So, even stations from the same brand can have different underlying fuel costs. This wholesale element is the starting point for why petrol prices vary before any local competition or operational costs are applied.

Local Competition and ‘Postcode Pricing’

Local competition is the primary driver of day-to-day price differences. Unlike national chains like McDonald’s, most fuel retailers do not set uniform prices. Instead, franchisees and company-owned stations adjust prices based on their immediate rivals. This practice is often called “postcode pricing.” For example, Sainsbury’s states it adjusts prices “using locally gathered pricing information” to remain competitive in each area.

This hyper-local focus can backfire for consumers. According to the AA’s Luke Bosdet, local price matching can artificially inflate costs. If one station has higher operating costs, it sets a high local benchmark. Nearby stations then match that price instead of lowering it. Consequently, drivers in that area pay more than those in a neighboring town with more aggressive competition. This explains why petrol prices vary so sharply across short distances.

Supermarket Strategy vs. Fuel Company Economics

Supermarkets play an outsized role in the fuel market. They own 20% of forecourts but sell 40% of the nation’s petrol and diesel. Crucially, supermarkets often use fuel as a “loss leader.” They accept lower margins to attract customers into their adjoining stores. In contrast, dedicated fuel companies like Shell or BP rely on forecourt profits alone. The Competition and Markets Authority (CMA) reports supermarket fuel margins averaged 8.4% in early 2025, while other retailers averaged 9.8%.

However, supermarket competition has weakened recently. In 2017, their margins were around 4%. This increase suggests they are competing less aggressively on price. When supermarkets raise margins, other local stations often follow. This reduction in cut-throat competition is a key reason why petrol prices vary less downward in many areas, keeping overall costs higher for consumers.

The ‘Rocket and Feather’ Effect and Slowing Declines

Motorists often accuse retailers of “rocket and feather” pricing. Wholesale price rises are passed to pumps rapidly (the rocket). However, price falls are implemented slowly (the feather). This asymmetry means drivers do not benefit quickly from dropping oil prices. Retailers may delay reducing prices to recover margins or simply because local competition lacks pressure. This behaviour further exacerbates the perception that petrol prices vary unfairly and without clear reason.

The CMA is now monitoring this issue. It plans annual reports on the fuel market and has advocated for a government-run price comparison tool. This tool, launching this year, will show real-time local prices. The aim is to strengthen competition by helping drivers shop around. Easier comparison could pressure stations to lower prices, potentially reducing the wild disparities between neighbouring areas.

How Drivers Can Navigate Variable Prices

Consumers are not powerless. Several apps and websites, like PetrolPrices.com, already provide local price data. Using these tools before refuelling can lead to significant savings. The RAC’s Simon Williams advises motorists to “vote with their right foot and drive on” if prices seem too high. Shopping around, even within a small radius, can be worthwhile.

In conclusion, petrol prices vary due to a complex mix of global markets, local competition, and retailer tactics. While taxes form the largest cost component, local pricing strategies create the starkest differences. The upcoming national price comparison scheme may help increase transparency and competition. Until then, informed drivers who actively seek the best local price are best positioned to mitigate the postcode lottery at the pump.