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?

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