Icelandic Oil Companies' Fuel Surcharge Reaches Historic High Amidst Price Drop

Fuel Prices See Initial Drop Following Tax Reform

As of January 1, 2026, Iceland implemented a significant change to its fuel taxation system, abolishing the traditional fuel tax and introducing a new kilometer-based road charge. This reform led to an immediate and noticeable decrease in fuel prices at the pump across the country. Petrol prices, for instance, fell by approximately 90 to 97 Icelandic Krónur (ISK) per liter, with 95-octane petrol dropping to around ISK 183.10 per liter at some stations, down from approximately ISK 279.60. Diesel prices also saw a substantial reduction, falling to about ISK 205.30 per liter.

The Icelandic Automobile Association (FÍB) had anticipated such a reduction, with managing director Runólfur Ólafsson stating that the price cut met expectations and was a positive development for consumers. The Ministry of Finance had projected a reduction of 95–105 ISK per liter for petrol and 80–88 ISK for diesel.

Oil Companies' Share Reaches Record Levels

However, a recent analysis conducted by the Icelandic Confederation of Labour (ASÍ), published on January 17, 2026, indicates a concerning trend. Despite the overall drop in pump prices, ASÍ's study suggests that oil companies are now retaining a historically large share of the fuel price. Róbert Farestveit, Director of ASÍ's Economics and Analysis Department, highlighted that while petrol prices fell as expected due to the tax reform, the oil companies' markup is at an unprecedented high.

ASÍ's findings reveal that between 2018 and 2021, oil companies' share had decreased due to increased competition and lower global prices during the pandemic. However, prices surged again in 2022 following Russia's invasion of Ukraine, and ASÍ notes that retail prices have not fully decreased in line with subsequent global price falls. This has resulted in an increased share for oil companies in recent years, a trend that appears to be exacerbated by the latest tax changes.

Underlying Factors and Consumer Impact

Iceland's fuel market is characterized by several factors that contribute to its high costs. As an island nation, Iceland relies entirely on imported fuel, incurring significant shipping and import expenses. Historically, a substantial portion of the retail price of petrol in Iceland has been attributed to taxes and fees, sometimes exceeding 50% of the total cost. For example, in January 2025, approximately ISK 170 of every liter of gasoline sold, priced at around ISK 320, went to the state, accounting for 53% of the total price.

The new kilometer-based road charge, while lowering pump prices, has also introduced new dynamics. Róbert Farestveit of ASÍ warned that the structure of these changes could disadvantage drivers of smaller, more fuel-efficient vehicles, as their operating costs might increase compared to larger vehicles. This shift means that while the visible price at the pump is lower, the overall cost of driving for some consumers may not reflect the full benefit of the tax abolition, due to the increased share taken by oil companies and the new road tax structure.