Why does the UK Government allow the petrol catastrophe?

After some stabilisation in the Ukraine war and also a realisation that much of Europe is not about to ban Russian oil imports, Brent Crude prices have dropped from $139 a barrel back down to around $110. 

$110 oil is still very expensive and will mean UK retail prices of over £1.60 for the foreseeable future. 

This is about 30% higher than pre-war and of course is broadly linked to the 30% increase in oil price. 

However, as we all know Retail fuel prices are a huge chunk of tax. Currently that is set at 57.6p per litre, plus 20% VAT on the remainder. 

If we take petrol at £1.60, this means you have 82.8p per litre of tax – just over 50%. This is 17p odd more in tax than when the fuel price was £1.30. 

Given the Petrol Retailers Association says we buy around 38 billion litres of Petrol and Diesel combined, that 17p is about £6.5 billion more in revenue per year, or nearly £600m per month in tax revenue for the Government. Diesel  prices are up to 10p higher, so this is an underestimate in all likelihood. 

This increase is very inflationary  in the short term, because the price goes up for transport, end prices for goods also go up substantially. Normally, you would see tax rises as anti-inflationary as they reduce demand, but for goods whose purchase are necessary inputs, this argument does not hold so much water. Less travel and less deliveries of goods will reduce economic activity in the long-term causing a recession but still cause a short-term bump in inflation. Great. 

The Government could easily reduce fuel duty by 5p in its Spring statement next week and help the country through its fuel price crisis. It cannot do this so easily on residential gas, which will mean home bills will remain high. All the more reason to help out with energy costs somewhere for consumers.

Reducing by 5p the fuel duty still means the Government revenues will be going up during the year from what was expected at the last budget, where prices were £1.42 on average which is well below where they will be in terms of 2022 predictions. Some analysts say £2 diesel is only a couple of weeks away as so much (33%) of our retail diesel was imported from Russia. 

Of course, the Government is less keen on telling everyone that due to the rise it must keep raising Vehicle Excise Duty. Currently electric vehicles are 33% of all new cars sold and with Fuel costs at this price, this is only going to go up. (Although, with home energy costs rising 200%+, the differential benefit in cost terms to electric is still reducing, but overall worth it). 

Longer term, all this means we must move to road pricing or back to higher taxes on car ownership and less on the usage. Hard times for an eco-loon Government intent on pushing everyone electric.

But now is the time to commission the long-term review whilst alleviating the short-term issues – a free popularity boost to the battered Government too.