Business secretary Kwasi Kwarteng has written to the Competition and Markets Authority (CMA) asking for an "urgent review of the fuel market" as prices at UK forecourts hit record highs.
The letter said that despite the government's £5bn fuel duty cut "there remains widespread concern about the pace of the increase in prices at the forecourt and, that prices may not fall as much or as fast as they rise".
The business minister wants the CMA to look at whether the cut has been passed on to customers as "the British people are rightly frustrated that the £5bn package does not always appear to have been passed through to forecourt prices".
He also asked for the investigation to examine "whether the retail fuel market has adversely affected consumer interests", including whether there are local variations in petrol and diesel prices.
"Drivers should be getting a fair deal for fuel across the UK," said Kwarteng. "Healthy competition between forecourts is key to achieving this, with competition working to keep pressure on prices."
He has asked for the CMA to respond with the findings by 7 July.
The price of filling the tank of an average family car with petrol has hit £100 for the first time as the cost of living crisis deepens. A cost of a complete diesel fill-up rose to £103.43, according to figures from the RAC last week.
RAC fuel spokesperson Simon Williams said: “Average fuel prices have shot up to new records yet again with petrol hitting 185.04p and diesel 190.92p.
"This is an increase of 2p a litre on both since Thursday and takes the cost of filling a 55-litre family car with petrol to £101.77 and has led to the first ever £105 fill-up for diesel.
“The speed and scale of the increase is staggering with unleaded going up 7p in a week and diesel by nearly 6p. This must surely put more pressure on the government to take action to ensure drivers don’t endure a summer of discontent at the pumps.
Soaring fuel prices have been driven by the war in Ukraine and moves to reduce Europe's dependence on Russian oil.
The Petrol Retailers Association (PRA) says its members passed on the 5p fuel duty cut after it was announced in March, but wholesale fuel prices have continued to rise since then, leaving fuel retailers "operating on extremely tight margins", according to the BBC.
Williams said: “It’s also important to realise that motorists tend to lose out most when there are significant drops in the wholesale price which retailers don’t pass on.
"This was the case in December when there was a big drop in the price of oil which should have translated to lower forecourt prices. Instead retailers stood strong, only lowering their prices by a couple of pence a litre when there should have been a 10p a litre drop in the average price of petrol.
“In a rising market, such as we’re experiencing in now, it’s very different in that retailers are constantly having to put up their prices to reflect the fact their costs are increasing every time they buy new stock.
"Since Russia invaded Ukraine on 24 February the wholesale price of petrol has gone up by 28%. This is why the government’s 5p March duty cut has had little effect, whether or not it’s been fully passed on by retailers, and why they need to go further now to help drivers.”
In May, Gordon Balmer, executive director of the PRA, hit out at the government saying: “Despite all fuel retailers passing on the 5p cut in fuel duty after the spring statement, wholesale fuel prices have continued to rise.
"This has resulted in a tightening of margins for petrol retailers, while the Exchequer has benefitted from substantially higher VAT receipts. For every 10p that the price rises, the chancellor claims back an extra 2p in VAT."
At current fuel prices, the government is now making around £46 in tax from every full tank, according to the RAC.
The AA welcomed the CMA review but called for a further fuel duty cut. "The government is still making 8.74p more in VAT than they were this time last year," Edmund King OBE, president of the AA, told the BBC's Today programme, "so there is money there for another possible duty cut."
He also said that retailers should publish fuel wholesale prices alongside pump prices in order to "increase competition locally" and keep prices down.
King pointed to differences of up to 8p a litre between local garages and supermarkets.
“We hope the government’s persistent talk about the importance of retailers passing on March’s 5p duty cut fully is a precursor to an announcement of a deeper cut this week. If that’s the case, it’s very welcome, albeit overdue as the 5p cut has been well and truly overtaken by events on the wholesale market since then,” said the RAC.
It comes as the Confederation of British Industry (CBI) warned households are heading for recession later this year.
The CBI significantly downgraded its GDP growth outlook to 3.7% in 2022, from 5.1% previously, and 1% in 2023 from 3% previously.
High inflation is the primary source of weaker growth, with the record high cost of living resulting in a “historic squeeze” in household incomes, which will lower consumer spending, the CBI warned.
High inflation has caused real household disposable incomes to fall by 2.3% over 2022 — marking the largest annual decline on record since the mid-1950s.