CNBC's UK Exchange newsletter: Pain at the pump stokes trouble at the top

A petrol pump on a Shell forecourt on March 9, 2026 in London, England.

Dan Kitwood | Getty Images News | Getty Images

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			This report is from this week's CNBC's UK Exchange newsletter, which brings you expert insights on the most critical business stories in Britain. You can subscribe here_.

Welcome to this week’s CNBC U.K. Exchange. Few issues are more troublesome for the British government than the cost of filling a car. No government has dared overturn a freeze in fuel duty, introduced on a “temporary” basis 15 years ago, which has cost the Treasury tens of billions of pounds in foregone taxes and placed huge pressure on the public finances.

The reason for this reluctance goes back more than a quarter of a century — to a time when some of the current cabinet were still at school.

The dispatch

The sensitivity of American consumers toward higher gasoline prices is well known.

Yet petrol costs matter hugely in Britain too — and pose a problem for Prime Minister Keir Starmer’s government should the Iran conflict drag on.

Starmer and his Chancellor (Finance Minister) Rachel Reeves have made cutting living costs their top priority and, before the strikes on Iran, were confident of making progress.

As recently as Feb. 5, when its latest quarterly inflation report was published, the Bank of England was forecasting that Consumer Prices Inflation (CPI) would fall to 2.1% — just above its target rate — in the second quarter of this year.

The surge in crude prices unleashed by the Middle East conflict upends that and piles further pressure on the public finances.

Starmer has already announced a £52.4 million ($70 million) package to support “vulnerable” households — a third of them in Northern Ireland — hit by a surge in the price of heating oil which, unlike gas and electricity, is not capped by the energy regulator Ofgem.

But higher petrol and diesel prices are a bigger problem. Ministers remain haunted by events in September 2000 when former Prime Minister Tony Blair’s government, with a majority as large as Starmer’s now, was rocked as farmers and hauliers blockaded refineries and fuel depots amid fury over taxes levied on petrol and diesel.

Shortages quickly followed, resulting in school closures, rationing in supermarkets and postponements of operations and postal deliveries.

The Chancellor Gordon Brown reacted by cutting duty on ultra-low sulphur petrol, freezing duty on other grades of motor fuel, putting more vehicles into the lowest vehicle excise duty band — a tax cut for most lorries — and taxing foreign truckers using British roads.

The protests were sparked by tax increases due to the fuel price escalator, a measure aimed at tackling climate change, under which fuel duty would rise by more than inflation annually.

Introduced at inflation + 3% in 1993, it was at inflation + 5% when Blair was elected in 1997, before Brown raised it to inflation + 6% in March 1999.

This meant that, when the fuel protests erupted, government taxes (Value Added Tax is added on top of fuel duty) accounted for more than 80% of the price of a liter of petrol.

George Osborne, Brown’s successor-but-one, scrapped the escalator in 2011 and cut fuel duty by a penny a liter before freezing it. Subsequent chancellors, terrified of angering “white van man” (a catch-all for self-employed tradesmen), have since maintained the freeze which, according to the independent Office for Budget Responsibility, now costs the Treasury £6 billion annually.

Rishi Sunak, as chancellor, even temporarily cut fuel duty by 5p a litre in 2022 after Russia invaded Ukraine, but Reeves, prior to the attack on Iran, had planned to phase this out after September. That now looks unlikely.

The government vs. retailers

In the meantime, Reeves and the Energy Secretary Ed Miliband have provoked petrol retailers with accusations of profiteering, which some found ironic given government taxes still comprise around 57% of the cost of petrol while retailer margins seldom exceed 6%.

The Petrol Retailers Association last week even temporarily abandoned talks with the pair after complaining their “inflammatory” language — Miliband accused them of “price gouging” — had led some employees to face abuse from customers.

The RAC, a breakdown services and motor insurance provider, warns that, with oil at $100 a barrel, petrol is heading to 150 pence a liter — a level not seen since June 2004 —  while diesel is approaching a three-year high of 180 pence.

This price surge poses a dilemma for the Bank of England which, prior to the strikes on Iran, was expected to cut interest rates this week, but is now unlikely to.

For ministers, mindful of events that unfolded when some of them were still at school, it is more toxic still.

— Ian King

Need to know

**UK economy fails to grow in January ahead of Iran war energy price shock. **Fresh figures show evidence of a lackluster British economy, which is now under further strain following the outbreak of the U.S.-Iran war.

**U.S. ‘misadventure’ in Iran has no clear exit strategy, Russia’s UK ambassador says. **Andrey Kelin, Russia’s ambassador to the U.K., told CNBC that Russia shares “a lot of sympathy” with Iran.

Social media giants urged to tighten child safety after UK rejects blanket ban for teens. Regulators are calling on social media giants to enforce stricter protection for children on their platforms after a blanket ban was rejected by lawmakers.

— Holly Ellyatt

Coming Up

MAR 19: Bank of England monetary policy decision

MAR 19: U.K. unemployment rate for January

MAR 24: U.K. PMI data for March

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