The debate over a possible new European windfall tax on oil companies raises a more fundamental question: how is the price of petrol and diesel actually formed?
The answer is more complicated than simply looking at the price of a barrel of crude oil. The amount paid by motorists at the pump is the result of several different components, some of which react immediately to international markets and others that remain relatively stable. Understanding this mechanism is essential to estimate whether taxing extraordinary profits could actually make fuel cheaper.
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From crude oil to the petrol station
The first component is obviously crude oil. Europe does not set the international price of crude. Oil is traded on global markets and prices react to supply, demand, geopolitical tensions, inventories, transport routes and expectations about future availability.
The 2026 energy shock provides a clear example. According to the European Central Bank, between the end of February and the first week of April, crude oil prices increased by more than 90%, while diesel prices at European petrol stations rose by around 34%. The difference is explained by the other components included in the final price.
For diesel, the crude-oil component has averaged approximately €0.47 per litre in the euro area since 2021, although the figure has fluctuated between €0.28 and euro 0.80. At the peak of the 2026 shock, it reached around euro 0.73 per litre. But crude oil is only the beginning of the journey.
Refining: where the market can change dramatically
Once crude reaches a refinery, it has to be transformed into usable products such as diesel, petrol and jet fuel.
The difference between the value of the refined product and the cost of the crude is reflected in refining costs and margins. This is one of the most important variables in the current European debate because refining margins can rise sharply when the availability of refined products falls. The ECB estimates that refining costs and margins accounted for around euro 0.13 per litre of diesel in the euro area at the end of February 2026.
Then the Middle East shock changed the picture dramatically. The disruption around the Strait of Hormuz reduced global exports of refined products by approximately 4.5 million barrels per day during the second quarter of 2026, according to the ECB. Refining margins for diesel consequently increased from around €0.10 per litre in February to €0.26 in March.
The increase continued during the summer. In the first three weeks of July, refining costs and margins contributed approximately euro 0.35 per litre to the euro-area diesel price and euro 0.23 to the petrol price. This is precisely why a rise in crude oil prices does not translate into a proportionally identical increase at the pump.
Distribution comes next
After refining, the fuel still has to reach the consumer. This stage includes transport, storage, marketing and the operation of petrol stations. Staff costs, rents, logistics and other operating expenses are incorporated into the distribution component.
Unlike crude oil or refining margins, these costs generally change more slowly. The ECB notes that distribution margins actually fell by around 14% compared with the end of February 2026, absorbing part of the increase in refining margins rather than amplifying it. This is an important distinction. Not every increase observed in the international oil market is automatically transferred through every stage of the supply chain.
Taxes can account for a large part of the final price
The final component is taxation. European motorists generally pay excise duties and VAT, although the exact amounts vary considerably between Member States.
Excise duties are normally charged as a fixed amount per litre. According to ECB calculations, their euro-area average since 2021 has been approximately euro 0.52 per litre for diesel and euro 0.66 for petrol. Several countries temporarily reduced these duties during the 2026 energy shock, although many of those measures expired in June.
The European Commission’s Weekly Oil Bulletin publishes the prices of petrol and diesel in all 27 Member States both including and excluding taxes, together with information on VAT and excise duties. The system is updated every week and is designed specifically to improve transparency in European petroleum markets.
The result is that two countries can have very different pump prices even when they buy crude oil at essentially the same international market price. The difference can come from taxation, refining structures, distribution costs, competition between retailers and national market conditions.
Why petrol and diesel do not move in exactly the same way
Petrol and diesel are both derived from crude oil, but they are not interchangeable products. They have different production processes, different demand patterns and different international trading markets. Their refining margins can therefore move in different directions. The 2026 shock offers a particularly clear example.
According to the ECB, diesel refining margins reached euro 0.35 per litre of retail price in the first three weeks of July, compared with euro 0.23 for petrol. That difference helps explain why diesel prices can sometimes rise faster than petrol prices even when both fuels are being produced from the same crude-oil barrel.
Seasonal demand also matters. Agricultural activity, road transport and heating-oil markets can influence diesel demand, while the summer driving season can support petrol demand.
What happened during the 2026 energy shock?
The current crisis provides an almost textbook example of how the system works. According to the European Commission, between February 27 and April 29, crude oil prices increased by approximately 65%, while refining margins for key products such as diesel and jet fuel reached historically elevated levels.
Reuters subsequently reported that, from the outbreak of the war on February 28 to August 24, oil prices had increased by about 25%, while European diesel prices had risen by more than 70% and petrol prices by around 20%.
These figures demonstrate that the relationship between crude oil and the price at the pump is not linear. When supply disruptions hit refineries and international trade routes, the price of the finished product can rise much faster than the price of crude itself.
So what happens every time the price of oil changes?
The mechanism can be summarised in five steps:
- Crude oil: the international price changes according to global supply and demand.
- Refining: crude is transformed into petrol and diesel, generating additional costs and a refining margin.
- Distribution: refined fuel is transported, stored and delivered to petrol stations.
- Retail: operators add their commercial margins and cover the costs of running the stations.
- Taxes: excise duties and VAT are added to the final consumer price.
The European Commission monitors these stages through its Weekly Oil Bulletin, while the ECB uses the same data to analyse how international oil shocks reach European consumers.
Where would a windfall tax intervene?
This is the key point for the debate over the proposed European windfall tax. A tax on extraordinary profits would not directly reduce the price of crude oil. Nor would it automatically reduce refining costs or the VAT paid by consumers.
Its effect would come through a different channel: governments could collect part of the extraordinary profits generated during an energy shock and then use the resulting revenue to reduce other taxes, subsidise fuel purchases or compensate households and businesses.
The distinction is crucial. The six EU governments currently asking for a new European framework — Germany, Spain, Portugal, Italy, Poland and Austria — want the EU to examine a new windfall-tax mechanism while also investigating refining margins. Their finance ministers argue that oil prices have risen about 25% since the beginning of the conflict, while European diesel prices have increased by more than 70%.
The proposed mechanism therefore targets the profits generated by the energy shock, not the underlying international price of oil.
Could €1 of additional tax reduce the price by €1?
No. That would be a fundamental misunderstanding of how fuel prices work.
Suppose a government collected additional revenue from an oil company through a windfall tax. It would then have to decide how to use that money.
If the entire amount were returned to motorists through a reduction in fuel taxes, the effect could be visible at the pump. But if the revenue were used for household subsidies, public transport, energy-transition investments or support for companies, the direct effect on petrol and diesel would be smaller or even zero.
There is also another problem: the price of crude and refining margins can continue rising after the tax is introduced.
A €0.05 reduction financed by public revenue could therefore be completely offset by a €0.10 increase in the underlying cost of refined fuel.
The numbers explain why the debate is complicated
The European market currently provides an unusually clear example. At the end of February, the ECB calculated that diesel’s crude component was around euro 0.47 per litre, while refining costs and margins contributed roughly euro 0.13. By July, the refining component alone had risen to approximately euro 0.35 per litre.
In other words, the increase in the refining component was large enough to become a significant driver of the final retail price, independently of the movement in crude oil. This is why the current European discussion is not simply about whether oil companies are making more money. It is also about where along the supply chain extraordinary gains are being generated and whether consumers are paying disproportionately for the disruption.
The European Commission’s Weekly Oil Bulletin will remain one of the most important tools for monitoring this process because it allows prices, taxes and price developments to be compared across all 27 Member States on a common basis.
The conclusion is therefore straightforward: the price motorists see on the display at a petrol station is the final result of a chain that begins with crude oil but ends with taxation, refining, distribution and retail margins. And that is precisely why the real impact of a European windfall tax cannot be measured simply by asking how much money governments could collect. The more important question is how much of that money could actually be converted into a lower price per litre.
