Oil is cheap, government is dear

It is not surprising that when China and India come to the party they need a lot more oil and the price goes up. Striking delivery drivers here do not help the situation either.

I can still buy a litre of petrol for around 45 pence, pre tax. That is good value compared with bottled water or soft drinks sold by the same measure. What I can’t afford so easily is the 70 pence of tax the UK authorities stick on top. (Based on the last price I checked out of 115p a litre – and I know it’s still going up at the pumps)

The Saudis have shown some political wisdom by offering to produce some more oil, as western politicians demand, if the West will, at the same time, cut its heavy consumption taxes on the products. As the UK government takes more than 60 pence in every pound charged for petrol, they should provide more than 60% of the price cut they are now claiming to want.

If Mr Brown really feels my pain at the pumps, he can ease it more quickly than the Saudis. I am ready to vote Yes to a government proposal to cut petrol duty any time he likes to make one.

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20 Comments

  1. Mark Williams
    Posted June 16, 2008 at 10:47 am | Permalink

    If Mr Brown wants to know how we can pay for a cut in duty the answer is simple. The Indian and Chinese governments pay billions to subsidise the price of oil in their own countries – i.e. to maintain/stimulate demand. Yet we, who pay billions in taxes supposed to reduce demand here, are sending £1 billion a year in aid to India.

  2. H
    Posted June 16, 2008 at 11:12 am | Permalink

    I dislike tax as much as the next man. But, if I have to pay tax, I'd rather pay tax the consumption of petrol than on my income or savings.

  3. Bazman
    Posted June 16, 2008 at 11:23 am | Permalink

    It will be interesting to see what happens when the high price of fuel prevents the minimum wage labour from getting into central London and other rich areas of the UK. Or at least makes these jobs not worthwhile. Will the London elite of people and companies start to pay more for their nannies and cleaners for example? Or will they find other people and methods? Who will work in the shops and other low paying work? The Liberal elite often talk of improving living standards, but when it comes to paying more for their hired help they do not want to know.
    Cutting the living standards of the minimum wage people is not a problem. Conservative and Labour governments have proved this, but the great and good it is another story.
    Have you noticed how bad the cutlery is getting in BA first class nowadays?

  4. Martin
    Posted June 16, 2008 at 11:28 am | Permalink

    Spot on John..I have been using the bottled water analogy in the many responses I have made to misinformed articles/commentators on the price of petrol during the last few weeks. Please turn your attention to that other rip off product gas..Because NuLab have failed to provide an adequate gas storage infrastructure we are in the idiotic position of exporting gas in the summer and then having to import in the winter at inflated prices. Regards, Martin

  5. Cliff
    Posted June 16, 2008 at 11:49 am | Permalink

    I agree, the main cost that makes the fuel expensive is the tax added to it by our government. I get so angry when I hear one of the government robots blaming the global price of oil for the high price. The reason for the high fuel costs in this country is government greed in order to fund crazy bad value schemes.

    We need to push for your suggestion John to get garages to show the cost of the fuel and the tax/duty payable as separate items on the till receipt. This will show clearly how much the government is ripping off the people they claim to represent. Are you doing anything to push this idea forward?

    The striking drivers have me somewhat confused. They are not employed by Shell, they are contractors. If they cause too much of a problem for Shell's business, won't Shell just change their contractors and thus put all the union members out of work? Are the union bosses too thick to realise this simple fact or are they, just as union leaders have in the past, just using the gulible workers to further their own political agenda?

  6. Ian
    Posted June 16, 2008 at 11:50 am | Permalink

    Oh…….if only.
    The decent thing for Mr. Brown to do would be to Abolish the VAT on fuel.
    We are taxed to the hilt on fuel, but then to pay VAT at 17 and a half %,only ads insult to injury.
    A tax on a tax.
    But Mr. Brown….decency…..forget it!

  7. Mark Wadsworth
    Posted June 16, 2008 at 12:20 pm | Permalink

    There is nothing wrong with a flat rate petrol/diesel duty to pay for the cost of road maintenance etc, the killer is the VAT on top. We ought to just exempt petrol/diesel from VAT … oh, we can't.

  8. David Eyles
    Posted June 16, 2008 at 12:25 pm | Permalink

    Down here in Dorset, diesel is £1.32/litre and rising. It is diesel costs which are contributing to inflation more than anything, because everything we buy is transported by lorry.

    Does anyone know why diesel, which is cheaper to refine than unleaded and yet has been steadily rising in price ahead of unleaded?

  9. Neil Craig
    Posted June 16, 2008 at 1:21 pm | Permalink

    I know Friedman said "“I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.” but I am not so sanguine the cost of government would automaticaly come down to match it. Just as I think those proposing spending increases are morally bound to say what taxes they would raise (though they never do) I think those going for cuts should say what spending they want to cut, as , to be fair, you have previously.

  10. Mark Williams
    Posted June 16, 2008 at 1:26 pm | Permalink

    David Eyles,

    Could it be the RTFO which has just come into force and requires a renewable fuels content in all petrol and diesel?

    Ethanol is added to petrol; transesterified vegetable oils are added to diesel. Ethanol is cheaper than egetable oils, but both cost more than fossil fuels.

  11. Bazman
    Posted June 16, 2008 at 1:54 pm | Permalink

    This will answer your question Dave. http://www.petrolprices.com/why-diesel-costs-more
    All that oil and gas sold off in 70' and 80's at knockdown prices to anyone who wanted to buy it. Then the power companies sold off to foreign companies. Gold now at record prices again the same story. The credit crunch was easy to see coming with low wages, sky high property prices, and other basic things rising in price. You don't have to look very far ahead or be clever to predict these things.
    An elite looking after their own interests is obvious.

  12. Acorn
    Posted June 16, 2008 at 2:00 pm | Permalink

    David. My friends in the Refinery business are telling me that Ultra Low Sulphur Diesel is more expensive to make than "conventional" diesel; known as "red" diesel in the UK. ULSD has a duty of 50.35 p/litre; red diesel, 56.94. If you have a tractor the duty drops – on red diesel – to about 10 p/litre.

    They also tell me that they are now making more diesel than petrol and not only the price of crude but the type of crude they buy, makes a difference to the price. The "landed" (?) price Friday was 55 p/l for ULSD and 42 p/l for 95RON low sulphur gasoline (petrol).

    Spare a thought for all those motor yacht owners who are currently paying 10 p/l duty for their diesel. They will be paying 56.94 duty on red diesel "for propulsion" from November next. Plus the VAT on the duty of course.

    It appears that the refinery to vehicle fuel tank element of the retail price is less for diesel than for petrol even though diesel is heavier than petrol – 1182 litres / tonne diesel with 1360 litres / tonne for petrol.

  13. Cassius
    Posted June 16, 2008 at 5:14 pm | Permalink

    What is the rationale in the Treasury charging tax as a percentage of fuel costs? Surely with a periodical budget, the Chancellor can and does decide at these intervals what amount of tax is needed from this source. If the pre-tax fuel cost varies after that, the government's taxation method just amplifies the change – and upsets the motorist the more. A flat rate of taxation, an amount not a percentage, would be equitable and provide the intended tax amount regardless of price variations in the oil market.

  14. mikestallard
    Posted June 16, 2008 at 6:00 pm | Permalink

    Here in the Fens, petrol seems to have run out in Wisbech at the moment: you have to go into the villages to get the stuff.
    Do you remember the Three Day Week and the power cuts? Labour always seems to provide those eventually.
    And here they are, back again.
    Crisis? What crisis?

  15. Matthew Reynolds
    Posted June 16, 2008 at 7:05 pm | Permalink

    They should axe the Royalty Tax on North Sea Oil to encourage new fields to be developed that would bolster supply long-term . High oil prices are cutting car usage and are providing an incentive for green , fuel , efficient technology to become more popular . Necessity is the mother of invention after all – the high oil price should be seen as a cloud with a silver lining as it should mean lower CO2 emmissions which whether or not one belives in climate change should give us cleaner air and this surely a good thing . We need cleaner , greener , fuel efficient cars so that we can have the freedom to drive without harmful pollution . We also need long-term solutions to energy and greater drilling for oil in the North Sea and in the South in places like Hampshire owing to wise tax reforms will I hope make us less reliant on volatile places abroad . The high oil price is not all bad if it makes us more green & long term in our public policy making . After all cars are far more fuel efficient than in the 1970's so the effect of higher oil prices will I trust be an incentive to have greener technology rather than a recession inducing calamity that they were 30 to 35 years ago. Let us hope that in 30-35 years time that long term thinking enables the UK transport system to be carbon neutral . Market economics and technology are solving the problems posed by the need to be eco-friendly . Government just has to set the framework needed to bring this about . Transport businesses should be making their vehicles fuel efficent t keep their businesses economically viable by keeping costs down . Surely that is win-win – they stay in business and Britain is greener as a result ? That is more rational than wanting a fuel duty cut that might be good for the short term but will do nothing to open up new oil supplies nor wean us off of our fossil fuel fetish . We need some oil of course from a stable homegrown supply but long term greener fuels & tehnology might be better if utilised to a greater extent as cars get greener and oil demand moderates . Why on earth rely on Russia of all places ?

  16. David Eyles
    Posted June 16, 2008 at 8:05 pm | Permalink

    Acorn, Bazman and Mark Williams: thank you for that information. My nasty suspicious mind was begining to wonder if it wasn't just a transfer of margin from petrol to diesel, just to keep the headline prices down.

    Nevertheless, because of the raised basic price of diesel, the VAT element is also raised ahead of petrol. Which means that lorry drivers are being hammered even harder by tax. And that in turn means the Treasury is making yet another inflation causing windfall.

    The other day I asked an artic. driver how much it cost to fill his vehicle up. He reckoned about £300 which is enough for one day's work. So say about £1800 per working week. Little wonder that the small firms are going out of business.

  17. John A Thomson
    Posted June 17, 2008 at 1:26 am | Permalink

    We should also consider the weak dollar and the number of speculators jumping into oil now that the credit crunch has revealed their past speculation to be a bad bet. Watch as loads of oil speculators get burned in times to come.

  18. William B.
    Posted June 17, 2008 at 2:44 am | Permalink

    Leaving aside practical considerations (such as the government's need to raise as much tax from as many sources as possible to pay for its profligate spending plans) there seems to me to be a fair, simple and lawful solution to the problem of the government receiving a tax windfall when the base costs of petrol and diesel rise. Why not have an upper limit to the amount of tax payable on each litre?

    We know that VAT must be levied to comply with EU law, so tinkering with VAT is not an option; but the level of fuel duty is not subject to the same restriction.

    If one starts with a base price of fuel at, say, 50p a litre and a base level of duty at, say, 50p, VAT will add 17.5p giving a total tax of 67.5p. For every 10p that the base cost of fuel increases VAT will increase by 1.175p so the duty could be reduced by 1.175p. The price at the pump will still go up but the total amount of tax will remain the same.

  19. James
    Posted June 17, 2008 at 9:03 am | Permalink

    It really is crisis, what crisis? I read the Daily mail talking about panic buying on Sat morning, and drove around East Anglia all day (it's not really that expensive if you work hard and earn a decent wage, people should try it) and saw not one petrol station that ha any queues or a lack of petrol, and I must have passed about 30.

    Tax on petrol. Let's face two obvious truths:

    1. If the government reduces it every time the international price rises, then OPEC are allowed the luxury of raising the price without any ill-effects from demand. Guess what they will do? It's simple free-market economics to deal with a cartel in this way.

    2. Lower taxes on petrol mean higher taxes elsewhere or higher borrowing, which leads to higher interest rates. Everyone believes there needs to be some government spending, and almost everyone (99% plus) believe that spending needs to be higher than the current tax take on petrol.

    But as I said – if people weren't so lazy and worked harder they'd find petrol surprisingly cheap.

  20. Neil Craig
    Posted June 18, 2008 at 2:03 pm | Permalink

    Given the option I would rather reduce corporation tax than fuel duty. Doing that is what got the Irish economy growing at 7%. Even a 1% increase in annual growth over 5 years would increase wealth by over 5% – over £100 billion. No credible tax cuts would do anything like as much. I know telling people we don't want them to have the cuts, it will go to all these nasty big companies, would outrage the BBC but the Irish not only accepted it. One of the main planks of the No campaign was that the EU might force them to increase corporation tax again. The British may not be less wise.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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