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Will there be a fuel duty rise?

Will there be a fuel duty rise? Photo: © CPRE

It’s a new year but one thing remains consistent: the price of oil is threatening the global economy.

Not so long ago in 2012Matthew-Ford-blog the global banking giant HSBC reported that rising oil prices threatened to “derail” the world’s fragile economic recovery. Motoring groups were also alarmed and had been pressing for some sort of government relief for years. In 2011 George Osborne succumbed to the pressure and scrapped the government’s fuel duty escalator - where fuel duty rises by inflation plus 1p - to the fair fuel stabiliser - where fuel duty only rises with inflation. To pay for this the Chancellor increased the supplementary charge levied on oil production from 20 to 32%.

Now we’re in 2015 and oil prices are at it again. But this time they’re too low. So low, in fact, that they’ve led to deflation in the Eurozone, which again is threatening to derail the world economy. But this time the chorus of people calling for the government to intervene and bring about a stable oil price through fuel duty rises is notably absent.

It’s precisely what ought to happen, if the Chancellor sticks to his original plan. This is because one of the stipulations of the fair fuel stabiliser was that if oil prices ever dropped below $75 a barrel the fuel duty escalator would be reintroduced. The Chancellor announced this in his 2011 budget when he said: “The fuel duty escalator that adds an extra penny on top of inflation every year will be cancelled – not just for this year, or next year – but for the rest of this Parliament. But I don’t want important investment in the North Sea lost. So if the oil price sustains a fall below $75, and we will consult on the precise figure, we will reintroduce the escalator and reduce the new oil tax in proportion.”

What this means is that fuel duty and taxes on the oil industry are now intimately linked. For one to go down the other must go up. Due to supply of oil being much greater than demand, oil is currently trading below $50 a barrel and looks set for a sustained period below $75. It, therefore, now meets the Chancellor’s commitment to reintroduce the fuel duty escalator and drop taxes on oil companies. But for now, the “fair fuel stabiliser” remains and fuel prices continue to fall.

What is very unfortunate is that at the same time as motorists are getting a major discount, rail passengers are being hit with another costly rise in their fares. Bus users too have seen 30 million miles of bus journeys cut because council budgets are being squeezed, with rural areas disproportionately affected. So what are rural users of public transport supposed to do now? How many of them will be tempted into driving when faced with expensive fares for services that are having their budgets cut?

And what does the Chancellor do? He’s already committed himself against reintroducing the fuel duty escalator in this Parliament. But he’s also stated that he doesn’t want to lose important investment in the North Sea.

If we look back to 2011, when the change to fuel duty was made, it’s clear that the Treasury never expected the cost of oil to drop so much. A Treasury spokesperson at the time declared ‘we do not expect this tax change (on the oil industry) to have a significant effect on production and investment - and therefore on jobs - in the coming years as profits are expected to remain high because of the oil price.’

As a result, George Osborne really has put himself between a rock and a hard place. With a high oil price he could more heavily tax the oil companies’ massive profits to pay for lower fuel duty. But with the price of oil now so much lower he can’t have his cake and eat it. North Sea oil profits are dropping and investment is drying up.

Industry experts are already declaring that the UK oil industry is “close to collapse” whilst calling for government intervention to prevent thousands of job losses. So does the Chancellor relieve the oil industry with a tax cut and enrage motorists with a price rise? Doing nothing is really not an option. Even if he keeps the oil tax at its higher level, the Treasury will see a decline in revenue because of the decline in oil company profits. He will have to magic up some money from somewhere to pay for this shortfall, but in an age of austerity there are no obvious answers.

Ultimately, the government will have to choose who is more important to appease: the oil industry or motorists. But with a very competitive general election just over three months away, motorists seem to have the upper hand. After the election, whichever party wins, the oil industry may get their way, resulting in a fuel duty rise. For those who rely on public transport, however, any relief on fares or service cuts still seems a long way off.

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16 January 2015

Ultimately, the government will have to choose who is more important to appease: the oil industry or motorists.

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