Osborne’s ‘fair fuel stabiliser’ doesn’t make sense

It’s a telling sign of our dependence on foreign oil that all eyes turn to the price of a barrel of crude as events in the Middle East, which ought to give us cause for hope, are causing despair in the UK with petrol hitting the £1.40 a litre level.

Richard George is a roads and climate campaigner at the Campaign for Better Transport

It’s a telling sign of our dependence on foreign oil that all eyes turn to the price of a barrel of crude as events in the Middle East, which ought to give us cause for hope, are causing despair in the UK with petrol hitting the £1.40 a litre level.

The last time oil tipped the $100 mark, back in 2008, the Conservatives proposed a fair fuel stabiliser to insulate motorists, hauliers and businesses from the swings of the market. George Osborne described the stabiliser as a:

“Common sense plan to help families, bring stability to the public finances and help the environment by making the price of carbon less volatile.”

Unfortunately, the chancellor hasn’t yet explained how his scheme would work in detail, but the broad brush principles are clear. As the price of oil rises, the stabiliser would kick in, reducing fuel duty. When the oil price fell, fuel duty would rise. Overall, the pump price of petrol would be more stable, and less subject to the machinations of derivatives traders and instability in the Middle East.

It all seemed alluringly simple, and was therefore anything but. Once in government the Conservatives found that the fuel duty stabiliser was riddled with flaws. Principally it showed a worrying misunderstanding of how overall revenue is affected by changes in the price of oil.

The idea that the government makes any additional money from hikes in the oil price was shot down by the Office for Budget Responsibility. Last year they analysed the impact of a £10 rise in oil prices, and concluded that as the price of oil rises, people spend less on other things. If the oil price rises temporarily, the Treasury ends up just about breaking even.

Long term, the Treasury are net losers from higher oil prices. Although annual oil and gas revenues would be £2.4 billion higher, by the fourth year, they’d be making between £1.5 and £3.5 billion less in overall revenue. In other words, there simply wouldn’t be any money to offset a cut in fuel duty.

Secondly, reducing higher fuel costs was only half the equation. As the price of oil fell, the Treasury would increase fuel duty to compensate. But this would be political suicide, not to mention bad economics. The OBR found that, in the medium-term at least, cuts in the price of oil actually boost tax revenue. And which chancellor is going to face a pack of baying red-top journalists and announce the government must raise the price of fuel because it’s accidentally become too cheap?

Interestingly, the UK’s peculiar combination of fuel duty and VAT has done more to stabilise fuel prices than any stabiliser ever could. Because so much of what we pay at the pumps is made up of duty (which isn’t affected by changes in the market price of oil) then changes in the oil price have less impact than in other countries. The EU’s oil bulletin, which collates data going back as far as 2005, shows that the cost of petrol in the UK has remained more stable than the EU average.

A litre of petrol in the UK is 33% higher than in 2005, but over the same time, average petrol prices across the EU rose 41% (37% in Germany, 55% in Spain and 47% in France). In Greece, which has some of the cheapest fuel, the price has more than doubled, up 118% in six years. Britain’s fuel regime adds stability to the market.

UK-and-EU-petrol-prices-indexed-to-2005
But leave the evidence aside for a minute. This weekend, David Cameron explained, at length, how government interference was stifling the economy. So why, when it comes to petrol, are they so keen to interfere in the free market? Given that their carbon reduction strategy (for transport, at least) is based on the premise that high oil prices will drive manufacturers to increase vehicle efficiency, surely tampering with the price of fuel would be counter productive?

Or is the market only supposed to be free when it doesn’t affect the government’s position in opinion polls?

Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.

17 Responses to “Osborne’s ‘fair fuel stabiliser’ doesn’t make sense”

  1. Richard Hebditch

    RT @leftfootfwd Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  2. Cllr Muhammed Butt

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  3. Kim Harding

    RT @RichardHebditch: RT @leftfootfwd Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  4. Kelvin John Edge

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  5. John Humphries

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  6. Broken OfBritain

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  7. cpz100

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense http://bit.ly/hyxWfV cant cut fuel cost whilst cutting services surely

  8. Simon

    Osborne’s ‘fair fuel stabiliser’ doesn’t make sense http://bit.ly/hPtBTA

  9. Anthony Masters

    I wouldn’t necessarily say that petrol is a free market, given we are talking about a Pigou tax on petrol. However, the latter part of the article is the most interesting part. Prices are, essentially, signals. By depressing the rate of the price increase, we decrease the incentive to find new oil, to make more efficient use of what we have and so on.

  10. Mr. Sensible

    The government can help families in several ways, including fuel, by canceling the 2.5% VAT increase it imposed in January.

    But, in the longterm, the government is missing an opportunity to persuade people of the alternatives by jacking up rail ticket prices by RPI plus 3% and other public transport cuts.

    No wonder David Cameron was forced to admit this weekend that the government is so far failing to live up to its billing as the ‘greenest government ever.’

  11. Kevin Richards

    "Dont let us get fooled again on false promises" – RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense http://bit.ly/hyxWfV

  12. Duncan Stott

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense http://bit.ly/hyxWfV

  13. SJ Smalley

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  14. Pat Oddy

    Can we please end this nonsense about helping ‘families’ run the ‘family car’? This is about motorists looking out for themselves and politicians (car-dependent) being too gutless to think and argue long-term. Most households have 2 cars now, whether ‘families’ or not; we don’t live in some kind of 1950s world. Why not think outside the box and privilege households without cars (council tax credit) and/or those who’s jobs involve car use?

  15. Thomas Byrne

    RT @leftfootfwd: Osborne's 'fair fuel stabiliser' doesn't make sense: http://bit.ly/hO8qo6

  16. A Cambridge academic studying 'Peak Oil'

    To be brutally honest, this debate has been done before and will be done again – arguably it never really stopped. It bores me.

    Fact 1: When the supply is squeezed the price increases – Economics 101.

    Fact 2: Oil is a finite resource. Whether we are past the moment of peak oil or whether it is in 20 years is ultimately an academic argument that only matters in terms of how we can adapt for the transition to a post-oil world – it will happen either way.

    Simply then, oil prices (in a general, global sense) are going and will continue to go up.

    The far more interesting discussion is about the falling energy demand in the UK opposed to rising demand elsewhere: why this is, how it can be built upon and accelerated to reduce our dependence on oil – therefore lowering total cost of oil usage NOT the individual cost of a barrel/litre.

  17. Chris

    oil can sustain us for at least another 50 years of stupid mis-use.

    Economics are another matter, we need to scrap the useless wind turbines (which rarley run abobe 20% of their theoretical output), and create brand new nuclear power stations which will be much more efficient than those built 50 years ago.

    this way we can use electric cars (and in return, develope the technology) without putting a strain on the grid. But the more wind turbines…

Leave a Reply