George Osborne promises lower fuel duty when price of oil is high, higher duty when oil price falls

In one of his more politically important announcements since becoming Shadow Chancellor, George Osborne has promised to introduce relief for motorists facing a double whammy of higher fuel duty and higher oil prices.

At the moment fuel duty automatically goes up when the price of oil goes up.  Under the Conservatives' "Fair fuel stabiliser" the duty will fall when the price of oil goes up.  The quid pro quo, however, would see duties rise when oil prices fell back.

Mr Osborne, making the announcement on BBC1, told Andrew Marr that if the Conservative policy was in place today motorists would be paying 5p less than they are currently paying under Labour. 

A consultation paper is being launched later today which will determine exactly how the "fair fuel stabiliser" will work.

CentreRight's Andrew Lilico proposed this very idea in 2000 and again recently.

10.30am: This just in from CCHQ:

"If a Fair Fuel Stabiliser had been introduced at the 2008 Budget:

> Fuel would be 5p per litre cheaper.
> This would save up to £3.50 on each tank of fuel for a Ford Mondeo, or £2.60 for a Vauxhall Astra.
> If, instead of rising, oil prices had fallen below the $84 forecast in the Budget, then fuel duty would have risen.
> In either case forecast government revenues would have been unchanged."

Comments

[Alan S]

As a critic of George Osborne I have just one thing to say about this...

BRAVO!

[oberon Houston]

Didn't I advocate the idea of using fuel duty as a leveler on Platform last month? Not sure if these plans were already under consideration then or not?

[Chips of Brookfield]

Why should I pay more when oil prices fall? Not exactly market forces - sounds like Labour in the 1970s!

[Editor]

Here is Oberon's article: The time for action on fuel duty was 2005.

[Andrew Woodman]

This looks politically astute and popular if dressed up as a tax cut not costing anything. Wonder how Labour will attack it.

[David Belchamber]

"Wonder how Labour will attack it".

They probably won't, Andrew. They will just adopt it!

[The Ghost of Tony Makara's Sanity]

Still not good enough... Penalised in the (relative, it has to be said!) 'good times' and given a trivial discount in the bad. This is just a middle of the road policy.

Don't forget where petrol prices were 12 months ago. 5p is meant to make much difference? 5p is an increase I can probably absorb... 30p is not.

Why won't he do something to stop the Treasury from making up the bulk of the cost of fuel?

[comstock]

A couple of points here

1) Why should motorists pay more towards education and pensions than non-motorists? Need to drive and car ownership simply doesn't correlate neatly to wealth. Some of the richest people in the UK are non-motorists because they live in Chelsea or a posh apartment in Docklands and don't need a car. The Sunderland shift worker is subsidising the Southern stockbroker's travel in a big way.

2) Beware the 'green tax' thing. If fuel duty is being used to fund things which should come from tax or NI, it isn't a green tax.

The 'green' lobby may say 'driving is bad- feel guilty and don't do it' but what is actually happening is ' Driving is bad but we need you to continue doing it and feel guilty so you cough up the tax without complaining'

I've said it before, I'll say it again 'a green tax is only a green tax if there is an alternative. Otherwise it is just a tax.'

[Editor]

The Ghost of Tony Makara's Sanity is not an acceptable name. Future comments using that name will be deleted. Play the ball, not the man.

[Casper]

Petrol tax is a stealth tax. The only fair and acceptable was of collecting fuel duty is to put that in a fund which improves roads or public transport system. (OK. the VAT element can be used elsewhere, if desired). The public tranport will hopefully provide an alternative in the long run.

I am just back from Singapore. A single 20km ride on their MRT cost 25p and it is infintely more pleasant than London underground which cost up to £4 per ride.

Elastic fuel duty is not really n

(Also, the Norwegian put their oil revenue is a special Soverign Wealth Fund while Gordon happily squandered all the north sea revenue away in a bottomless sink)

I wonder why petrol retailer are not listing the amount of duty in the receipt so that people can reminded of what is going on each time they fill up.

[Doug]

This is what I've wanted to see.

[Tim Worstall]

Depends how the details work out but this could be very clever indeed.

(Let's just assume that the IPCC and the Stern Review are correct here, shall we? No arguments that climate change isn't happening.....just for the set up for this argument, at least).

We've been told that the solution to climate change is to add the social cost of carbon emissions to those things which emit carbon. Excellent: we've even been told what the rate should be, the $85 per tonne CO2 from the Stern Review. This is 11 p per litre petrol.

OK, the market has already inflicted this upon us. All we have to do is say that if the crude price falls we'll raise the tax level so as to maintain the pump price.

And that's it: as far as petrol and cars are concerned, that's all we have to do about climate change. (Remember, we are stipulating here that Stern is correct.)

There's a side issue as well: we'll be transferring some of the high cost of oil from the Saudi Treasury to the one in London, not a bad idea on the face of it.

Use the money raised to drop some other tax/pay off debt so it's all revenue neutral.

[Buckinghamshire Tory]

Indeed Alan S, bravo.

I am beginning to think that George Osborne will grow into his role as Chancellor of the Exchequer.

[Mark Hudson]

An unwarranted intervention into the free market. Why not cut the tax on petrol full stop? Oil companies, on average, make less than 10% on a barrel of crude oil anyway.

[comstock]

Tim, what does this 11p per litre figure represent?

Could you post up your maths please?

(I'm genuinely interested here)

[Raj]

This is an interesting idea, provided prices will still rise by a degree when oil prices do. Prices should reflect in part global demand.

[Andrew Lilico]

Everyone seems much keener on the idea here than they were in responding to my piece proposing it!

I'm glad that the Party has been more interested in this idea than they were in 2000.

[Peter W]

While any reduction even temporarily of course is welcome, 5p is really a small reduction and won't make that much of a difference. Were the petrol prices not something like 90p a year ago?

[Jack Stone]

The days of cheap petrol are over. The sooner people get use to that fact the better.

[RichardJ]

"An unwarranted intervention into the free market. Why not cut the tax on petrol full stop? Oil companies, on average, make less than 10% on a barrel of crude oil anyway."

Seconded.

"The days of cheap petrol are over. The sooner people get use to that fact the better."

Oh, what a surprise, look who's back.

[Peter W]

If a litre of Unleaded cost 115.0p:

petrol duty 50.35
VAT 17.13
product 37.35
delivery 10.17

So the state takes 67.48.

Source:
http://www.petrolprices.com/price-of-petrol.html

[Tanuki]

Peter W@13:41 has the essentially valid point.

if you accept the Stern "carbon externality" green-tax price posited by Tim @11:37 then surely we should be replacing both the current fuel-duty+VAT with a simple tax of 11p/litre!

Now there's a way to sell 'green' taxation to the masses! Petrol at 58p/Litre. Propose that and you've a guaranteed 100+ majority at the next election.

[Andrew S]

"Why won't he do something to stop the Treasury from making up the bulk of the cost of fuel?"

Then the treasury would look to replace that lost revenue with taxes elsewhere, so people will be no better off

[comstock]

Tanuki, if the Tories are promising 58p a litre petrol, I'll vote for them.

Hell I'll even campaign for them!!

I think I'm pretty safe, given the fact it was the Tories who introduced the Fuel Duty escalator in the first place......

[bluepatriot]

Vince Cable's reaction (quoted in The Telegraph):

"Mr Cable, a former chief economist at Shell, said Mr Osborne was "presuming a knowledge of future trends in oil prices which is not shared by most people who look at these professionally".

He insisted the proposals opened "a huge hole" in Tory spending plans.

"If George Osborne wants to be taken seriously, he needs to explain what assumptions he's making about the trend in oil prices," Dr Cable said.

"This will mean that, if or when prices fall, motorists can be fully prepared for the tax increase the Conservatives would then introduce.""

[Ken Stevens]

Combine a balanced price/tax fuel scheme with a lower flat rate road tax and perhaps then a more acceptable means of introducing such a measure.
Fuel usage is an automatic regulator: the more you use, the more your emissions, the more tax you pay.

[Ray Griffin]

This is a price policy by another name. George Osborne is effectively setting price of fuel.

As well as fixing prices, this copies Labour in another way - a policy that sound great in headlines but does not make sense when one stops and considers the implications.

This will be ok if Osborne puts pump prices back to around 85p a litre. But no doubt it'll be used to keep pump price where they are, especially once we've become accustomed to paying them.

[David Sergeant]

"If George Osborne wants to be taken seriously, he needs to explain what assumptions he's making about the trend in oil prices," Dr Cable said.

Has Dr Cable accidentally or deliberately missed the way this will operate? Surely the whole point is that the system is flexible and reacts to whatever trend happens? Or is it such a good idea that Cable has got to say any old rubbish to counter it?

[Malcolm Dunn]

Didn't support this when Andrew Lillico proposed it and don't support it now. Labour will attack this as being fiscally irresponsible (what is going to replace the lost revenue?)and it grieves me to say they will be right.

[comstock]

"what is going to replace the lost revenue?"

Raising the higher rate of tax to 50%?

(comstock dreams on.....)

[Libertarian]

Your picture caption on the frontpage is very risque. Relief at the petrol pump is a great policy but it should be given by a pretty young lady rather than George Osborne!

[David Sergeant]

"Labour will attack this as being fiscally irresponsible (what is going to replace the lost revenue?)and it grieves me to say they will be right."

Posted by: Malcolm Dunn | July 06, 2008 at 19:53

Sorry to keep picking at this but isn't the whole point that there will no lost revenue because the reduction in fuel tax is as a direct response to increased tax income resulting from increased prices. Or have I fallen asleep somewhere.

[Malcolm Dunn]

David Sergeant, even if you were niave enough to believe that Darling's economic forecast are in any way accurate we will still be borrowing £43 billion this year. The likelehood is that as tax receipts fall we will be borrowing substantially more. This is disastrous and any proposal that is in effect a tax cut which this measure is will make the situation worse unless of course the revenue lost is offset by spending cuts.

[Andrew Lilico]

Raj@12:35

In my 2000 Bow Group and European Journal articles, I stated explicitly that petrol prices should still be allowed to vary in response to oil price changes, but significantly damped around the target price determined by environmental considerations.

Whether Osborne will go for this presumably depends on the outcome of the consultation.

[Andrew Lilico]

Incidentally, if anyone happens to be interested in any of my original pieces on this, you could check the following:

http://www.europeanfoundation.org/docs/ej0801.pdf

(pp8-9)

I'll look up the Bow Group paper (which is a bit longer and better produced) and put it up in due course.

[Tim Worstall]

Comstock,
Sorry, the maths is lost in the mists of time, I originally did it as a little blog piece for the ASI.
But the basics of the calculation are: $85 per tonne CO2 emissions. Then find out what are the CO2 emissions of one litre of petrol. Divide one into the other and then exchange from dollars to sterling.

11p is (depending upon exchange rates) correct.

[Scott]

If this is such a great idea why did the Conservatives fail to support identical proposals put forward by the SNP just last week in the House of Commons?

[passing leftie]

There is no more perfectly tuned behaviour modifier than the price of petrol. The rise in oil prices and duty has seen significant changes in driving behaviour and vehicle buying patterns. It's been far more effective than admonishments.

We need to reduce our dependency on oil, and this is an excellent way to do it.

Osborne's suggestion pretty much makes him a dodgy hedges fund manager. While oil prices are high he can boast "taxes would be lower under the Tories" but watch this pledge disappear if prices start falling again.

[Campbell McNeill]

This is spot on.

The government argues that the extra fuel tax receipts are off set as that money doesn't get spent elsewhere in the market.

This is completely flawed. Lets say additional fuel cost takes money away from the retail sector. This money is very much required at a time when they are vulnerable. By taking a disproportionate amount of tax from one sector destabilizes the whole economy.

[Felicity Mountjoy]

This is the sort of policy we can sell on the doorstep.

Very good from Georgie boy.

[Andrew Lilico]

Incidentally, I didn't merely *proposed* this idea in 2000. I devised it. It is my concept.

[David Sergeant]

Malcom Dunn says it's a tax cut, George Osborne says it's revenue neutral. Er, wonder who to believe.

A disturbing feature of this debate is the extent so many people have apparantly believed Cable's and labour's blatent misrepresentation of what Osborne said. The desparate nature of these misrepresentations suggests it is no longer good enough coming out with a policy, preparation for following up and dealing with the fall out will now be necessary.

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What will happen with George Osbournes Fuel Stabiliser program now