The Plan Of The Oily Man

There was little wriggle room available this year for the Rt Hon Gideon George Oliver Osborne, heir to the Seventeenth Baronet, to give some crumbs of comfort to the lumpen proletariat prior to the upcoming local elections, so he’s focused what little there is on motorists.

There was little else of note in today’s Budget: a small increase in the personal income tax allowance, no increase in alcohol duty, and more Enterprise Zones, but no desire to address air passenger duty, and just an assurance that he will on some future occasion look at ending National Insurance as a separate tax.

So let’s look at the Osborne plan for fuel duty. The “escalator”, which dates from 1993, the period of a previous Tory Government, is to be “scrapped”, well, for now. And duty is to be cut by a penny a litre, although January’s VAT increase already put the cost up by 3p. To compensate for the shortfall in revenue, the “supplementary charge” on oil and gas production will rise from 20% to 32%.

And this is where it gets difficult for Osborne: this increase, which is expected to yield £2 billion in a year, is on companies which extract oil and gas around the UK only, and those reserves are dwindling. Moreover, the cost of getting the remaining reserves out of the ground – and developing new fields – is increasing.

So it will benefit those producers to extract less oil and gas from UK reserves, and put their efforts into those parts of the world where it’s easier to get at the stuff, or Governments are less inclined to tax it. And that would mean the amount of dosh that comes rolling into HM Treasury could fall short of expectations.

The only way that the additional tax on oil and gas production can be averted appears to be if the price of the stuff on world markets falls below $75 a barrel, or whatever level Osborne decides, at which time the “escalator” would return and revenues would focus on the motorist once more.

And that’s the problem: this “fair fuel stabiliser” is effectively betting on the price of oil coming back down – something it thus far does not appear inclined to do – and assuming that, in the meantime, producers currently exploiting reserves around the UK will still be inclined to do so, even after Osborne’s tax increase.

The potential downside is that we could become yet more dependent on foreign supplies, with no guarantee that prices would not rise anyway. Fuel prices have a nasty habit of coming back to bite Governments, and this one is not immune.