Oil Prices Q&A
Why are oil prices rising?
World oil prices have trebled in the last few years - hitting us and every country hard.
Internationally, there is more demand for oil, but supply has not been able to expand fast enough to meet it.
For example, there has been rising demand from rapidly developing countries like China and India who have been growing at around 10% in recent years.
What has happened to Fuel duty levels under this government?
Fuel Duty rates have fallen since 1999 in real terms.
The Government has only increased duty rates three times since 2000. We’ve either cut or frozen fuel duty 11 times since 1999. We deferred the April rise in this year’s budget too, in recognition of the pressure people were under.
Had we continued the Tories’ policy of the fuel duty escalator, petrol would be 34p higher at the pump today.
Why is the government not getting big increases in revenue from high oil prices?
When oil prices go up, the government doesn’t necessarily get any extra revenue. Whereas, high oil prices mean some revenues go up, they mean others go down. The effect on the overall government finance is more complex than suggested by looking at just one tax alone.
• Fuel Duty: As fuel prices rise, the Government does not receive any additional revenues from fuel duty because it is a flat rate (i.e. a fixed amount per litre regardless of total petrol prices). In fact, as higher prices lead to reduced demand, Government is likely to get less revenue.
• VAT: claims about ‘VAT windfalls’ from high fuel prices are greatly exaggerated. People have broadly fixed spending power. When they spend more on petrol, they tend to spend less on other goods. So when VAT receipts from petrol rise, VAT from other goods tend to fall.
And businesses – including road hauliers – are in any case able to reclaim VAT on fuel.
• Oil Prices and Government spending: High oil prices may mean additional tax from oil companies (petroleum revenue tax and North Sea corporation tax) but this will also depend on how much more investment, firms do in response to higher prices.
High oil prices also tend to mean less tax from other companies – high energy costs means lower profit and therefore less corporation tax to government.
And, most importantly, any temporary increase in inflation – resulting from higher energy costs - will mean government must spend more. Many income tax/national insurance allowances and social security benefits are index linked to inflation – so all go up and leave less money available for other government spending plans.
So what would be the effect of introducing a fuel duty regulator to cut fuel taxes when oil prices rise?
Because of the complex effects on revenues from higher oil prices, far from being fiscally neutral as SNP claim, this would result in losses to the public finances, and would create uncertainty about the overall level of revenue available to meet Government spending plans.
What about tax levels on the oil industry?
North Sea fiscal regime is designed to ensure the UK receives a fair return from the extraction of its national resources, while encouraging the new investment needed.
Following this series of oil price rises beginning in 2004, the government doubled the supplementary tax on UK oil and gas production.
The majority of oil companies now pay 50% tax on their North Sea profits, and some of the most profitable fields pay 75% - compared to corporation tax of 28% for other large companies.
What about other countries and fuel taxes?
Comparisons are often made to other EU countries having lower fuel duty levels than the UK. But this doesn’t show the whole picture, most put higher rates of VAT on fuel than we do. And almost all have significantly higher taxes on the wider economy– e.g. much higher income taxes.
Despite reaching record highs, UK petrol prices (including tax and duty), have increased at a slower rate than many other EU countries.
UK petrol prices are now lower than those in France and Germany.
For hauliers, the fuel tax differential is in many cases offset by lower labour taxes and other employer costs in the UK. For example, overall operating costs are similar to those in Italy, Germany, Belgium and The Netherlands.
What can we do about energy prices?
We can alleviate growing energy prices to some extent by national measures like the further increases in winter fuel allowance this year and freezing of fuel duty – as we did in the Budget - but in the end they require solutions that no nation can deliver alone. Global problems need global solutions.
The government is urgently seeking international cooperation for a new global approach to oil and energy policy that removes barriers to increased supply of oil and gas and strengthens measures to reduce demand - both from an open and transparent dialogue between producers and consumers.
Greater energy efficiency will reduce energy prices. A diversity of energy supply - renewables and nuclear - will reduce our dependence on oil. We’re setting out plans for a tenfold increase on our current deployment of renewables and measures to facilitate the building of new nuclear power stations. We’re pressing for tougher EU-wide fuel efficiency target for cars and exploring the scope to accelerate the introduction of electric vehicles.
