It is encouraging to hear that the Prime Minister, Chancellor and Chief Secretary to the Treasury are all so keen to see drivers benefit from lower pump prices.
So keen are they that falling oil prices are reflected on the forecourts that they have said to petrol and diesel distributors that they are watching them “very carefully”.
But whatever the imperfections of the commercial fuel market – and the OFT decided in January 2013 that they were not enough to result in a referral to the Competition Commission – would our political leaders not be better off spending as much time scrutinising their own actions as those of private companies?
The fact remains that well over 60% of the price of fuel at the pumps is down to taxation. Actually, because fuel duty is levied at a fixed amount, the proportion of tax increases as oil prices fall.
Drivers will be grateful that the Chancellor has frozen fuel duty over a number of years but that does not mean there is no more he could do. When compared to other EU countries UK pre tax fuel prices are amongst the cheapest. After tax they are amongst the most expensive.
In the UK, tax – levied for a reason that is not clear: is it an environmental tax, general revenue raiser, or designed to cover all the external costs of driving including congestion and road safety? – remains the biggest driver of fuel prices. This explains why significant drops in the oil price are not going to be similarly mirrored at petrol stations.
What’s more, the Chancellor said in the 2011 budget that if oil prices fall below $75 a barrel, then he will reintroduce a fuel duty escalator:
“The Government will abolish the fuel duty escalator and replace it with a fair fuel stabiliser. When oil prices are high, as now, fuel duty will increase by inflation only. UK oil and gas production is more profitable at such times, so it is fair that companies should contribute more. The Supplementary Charge on oil and gas production will therefore increase to 32 per cent from midnight tonight.
“In future years, if the oil price falls below a set trigger price on a sustained basis, the Government will reduce the Supplementary Charge back towards 20 per cent on a staged and affordable basis while prices remain low. Fuel duty will increase by RPI plus 1 penny per litre in each such year. The Government believes that a trigger price of $75 per barrel would be appropriate, and will set a final level and mechanism after seeking the views of oil and gas companies, and motoring groups.
“As the increased rate of Supplementary Charge will only apply when prices are high, the Government will restrict tax relief for decommissioning expenditure to the 20 per cent rate to avoid incentivising accelerated decommissioning. There will be no restrictions to decommissioning relief below this level over the course of this Parliament, and the Government will work with the industry with the aim of announcing further, longer-term certainty on decommissioning at Budget 2012. Recognising the importance of continued investment in the North Sea, including in marginal gas fields, the Government will also consider with the industry the case for introducing a new category of field that would qualify for field allowance.”
Not surprisingly the Chancellor has not been reminding people of these comments recently.
Yet, ironically, what drivers gain from falling oil prices, they are set to lose in above inflation rises in fuel duty. If the cost of oil drops just a few more dollars and the Chancellor sticks to those 2011 proposals then fuel duty could well rise by about 2p a litre.
The problem for Mr Osborne is that he is sending our mixed messages. At the Conservative party conference in 2013 he pledged that providing he could find the savings to pay for it he would freeze fuel duty until the election, but as we have seen he has also committed to hikes in duty above the rate of inflation if the oil price tumbles. Which is it to be?