The claimfactFiction3 Whats a fair price for petrol?

“I do think there’s a very attractive idea of saying that as oil prices rise and as the Treasury potentially benefits from some revenue from those oil price rises… is there a way of sharing the pain of increased petrol prices between the motorist on the one hand and the Treasury on the other?”
David Cameron MP, Prime Ministerial press conference, January 13

The background

From dressing up as The Stig for Jeremy Clarkson’s 50th to loving his Lexus, the Prime Minister is always keen to show he’s a friend to the motorist. And this week he’s been feeling their pain: “When you’re filling up the car and it’s £1.30 a litre it is incredibly painful for families,” he told the BBC.

And filing up has been getting more painful. Petrol now costs about £1.28 a litre –  that’s because oil is getting more expensive, and fuel is being taxed more. Tax has risen 3.5p a litre this month (0.76p in extra duty and 2.7p because of the VAT hike).

And there’s more to come. Oil prices are racing towards $100 a barrel, which the AA says will push the average price to 132p, or £6 a gallon. And duty will go up again in April – by 1p a litre – because of the ‘Fuel Escalator’, designed to try to reduce pollution.

Cameron promises the Treasury are busy doing their sums. So, do they benefit from rising oil prices and should they be sharing those proceeds with the motorist?
The analysis

The government can’t control oil prices – but it can control tax. Having just raised VAT, it’s fuel duty that’s more likely to be changed.

In 2008, the Conservatives pledged to introduce a “Fair Fuel Stabiliser” – saying fuel could be 5p cheaper per litre with no hit to the Treasury. The idea is that fuel duty would be cut when oil prices are high, and would be increased when oil prices fall.

It’s an idea that’s got the support of the business lobby. The Federation of Small Businesses say the rising petrol prices are undermining economic recovery.

Once in power, the Chancellor asked his own Office of Budget Responsibility to run the numbers – and they found the Fuel Stabiliser numbers didn’t add up.

As our economics editor Faisal Islam blogged last week, the OBR calculated that a temporary rise in the oil price of £10 per barrel wouldn’t raise any money for the Exchequer. That’s because while they would obviously take in more tax on the fuel sold, that would be offset by the negative impact it would have on the economy overall.

And if there was a permanent rise of £10, the exchequer would lose about £3bn a year, because of falling revenues elsewhere, they said. So to cut fuel duty as prices rise would cost the Treasury even more.

And it’s not a popular idea in the industry.

The Retail Motor Industry Federation (RMI) predict chaos: petrol stations would be empty in the run up to a price drop, and then overwhelmed as the new, lower price comes in. Brian Madderson, chairman of the RMA, told FactCheck: “It’s an administrative nightmare that just adds more red tape, which this government said it was getting rid of”.

Transport Secretary Philip Hammond has acknowledged there are “technical difficulties” with the idea.

Mr Madderson said he had assumed that the OBR report had knocked the idea of a stabiliser on the head and that the government hadn’t yet consulted any of the industry trade bodies. “The intellectual arrogance is absolutely extraordinary,” he told FactCheck.

So, instead of introducing a Fuel Stabiliser, they could just cancel the Fuel Escalator, which is due to increase prices again in April. The industry would like that – but the measure does tick the government’s environmental agenda. Green groups would resist that cut hard, saying we need to realise the days of cheap fuel are over. Friends of the Earth told FactCheck “we need a gradual rise in the price of fuel that provides a clear signal to people of the way things are going.”

The verdict

The government’s between a rock and hard place – or rather between increasingly angry motorists, a Treasury strapped for cash and a powerful green lobby.

We’ll give the Prime Minister a middle rating on this one. There’s not a case for a Fuel Stabiliser, given that the OBR have shown it could be very costly for the Treasury and that industry insiders say it would be a cumbersome, impractical measure. But David Cameron did acknowledge it was not economically straight forward.

As to whether or not the Chancellor will cut the Fuel Escalator in his March budget remains to be seen. It’s politically tempting, but will be financially and environmentally tough.

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Category: David Cameron, Economy
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