Thursday, January 13, 2011

Fuel Price Stabilizer

"£70 to fill up with petrol!" froths the Daily Mail today, in a reaction to the increasing cost of oil.

The benchmark Brent Crude is currently hovering just below the psychological $100/barrel level - it's at $98.45 as I write. This is down to a few factors including the current disruption to supplies caused by the trans-Alaskan pipeline closure and problems in Norwegian North Sea oil fields.

This has caused people to remember the 'fuel price stabiliser' originally proposed by the Tories as a response to the last oil price high. The logic goes, when the oil price rises you bring fuel duty down, and when it falls, you put it up, thus giving some predictability for motorists.

The Tories have tried to kick this idea into the long grass in the past, and Cameron again tried to do that at the weekend, saying ‘I don’t want to raise people’s hopes too far because it is a difficult issue'.

This idea is not well-thought-through. Unless your objective is simply to reduce fuel duty, the scheme needs to be revenue-neutral over the longer term, and that requires a prediction of the future oil price to be made. As the oil price is on an upward trajectory at the moment, this would mean that the first effect of the 'stabiliser' would be to stabilise the price of petrol at a higher level, meaning an immediate price increase - which won't poll well. If the oil price continued to increase, then it would be necessary to reset the duty level, again causing an immediate and substantial increase. Note that fuel duty is a fixed price per litre, so the revenue does not increase with the oil price. VAT on the other hand does net the Treasury a windfall as the price increases, but it's not huge - a 10p/litre increase would net an additional 2p/litre, working out at slightly less than 2% of the current price.

Next, there is the fuel price escalator. The Mail is a little misleading on this one, claiming that fuel duty will increase by 5p/litre on April 1st. This is true, but it's composed of the inflation component which keeps the fuel duty value constant in real terms, and the 'escalator' which is only 1p/litre. So the real-terms increase is actually 1p/litre. (source)

The plain fact of the matter is reducing fuel tax does not shield motorists from rising oil prices. It's a lot more painful in the USA where taxes on fuel are low - each crude price rise increases the pump price by a larger percentage than in the UK. The only way to protect the economy from the oil price is to reduce dependency on oil, and that's an area where the Tories have a record that is less than stellar. In the absence of Government action, it's the forecourt price that forces people to look at their vehicle choice and their transport habits.

Lastly, the Mail journos should look back over the news recently and see how train fare increases and food price inflation have been punishing ordinary folk. I'd suggest that motorists are not a uniquely deserving case, especially as the cost of motoring has gone down over the last 10 years, and tinkering with the fuel price will benefit the owners of thirstier, dirtier, larger-engined vehicles disproportionately.

2 comments:

  1. Kaku Enterprises is one of the leading high quality stabilizer manufacturers, suppliers and exporters in Delhi, India. We are exporter of AC Wall Mountable,Air Conditioner Stabilizers and Digital Refrigerators Stabilizers.

    ReplyDelete
  2. Kaku Enterprises is one of the leading high quality stabilizer manufacturers, suppliers and exporters in Delhi, India. We are exporter of AC Wall Mountable,Air Conditioner Stabilizers and Digital Refrigerators Stabilizers.

    ReplyDelete