Monday, 24 January 2011

The myth of the "Fair Fuel Stabiliser"

Boris Johnson is the latest figure to complain about fuel prices and call for a "fair fuel stabiliser" to offset rising petrol prices.

Under this policy proposed by George Osborne, tax on fuel would fall as oil prices rise so as to "stabilise" the price.

According to Osborne (PDF) 

"Currently, when oil prices rise, the government receives a windfall increase in tax revenues, mainly due to taxes on North Sea oil production. And when oil prices fall, the government suffers an unexpected shortfall in revenues for the same reason."

Unfortunately for George the idea of a government "windfall" from rising oil prices is a myth. As the Sunday Times economics editor pointed out on his blog recently:

"Why is a fair fuel stabiliser, a Conservative policy before the election and now back in the news, not a good idea? Because, according to the Office for Budget Responsibility, it is a myth to say that the government gains from a temporary (or permanent) rise in oil prices." 

And indeed if you take a look at the OBR's report from last year, you see that:

"Allowing for offsetting effects, particularly from the impact from a weaker economy means there is very little or no improvement in the public finances that could be used for stabilising the pump price."

In fact as these OBR spreadsheets show, rising oil prices can actually decrease the amount of tax taken by the government overall:

So if the government wants to introduce a "Fair Fuel Stabiliser" they will have to do it by raising taxes, charges and fares even more elsewhere.

And while motorists may save a few pennies, public transport users will continue to suffer ludicrously unfair and unstable travel costs.

In any case, for most families the effect of a fair fuel stabiliser would be barely noticeable with even George estimating (in 2008) that it would save them just "over £90" a year.

And with the cost of a single tank of petrol well on its way to that, it will be the fairness of that overall price and not its "stability" that most voters will focus on.


Anonymous said...

World demand for oil is rising. Discovery of new oil fields is not keeping pace, and where there are new discoveries there are serious political, environmental and technical challenges. Therefore the trend in the world price of oil is upwards. The spike in 2008 was an overshoot, and oil prices fell, but they are now set to rise again: we're not going to see oil prices of 10 or 20 dollars per barrel that we saw at the end of the last century.

Therefore a tax regime that cuts taxes when oil prices rise, and raises them when oil prices fall, is going to mean a loss of tax yield. Falls in oil price are going to be less frequent than increases in oil prices: such a tax regime will not be about smoothing variations; it will mean hiding the underlying rise in oil prices.

Conservatives claim to be in favour of market signals and in favour of "nudging". In cases like this, of course, market signals create a panic, not a search for new strategies. Gentle "nudging" is seen as a "war on the motorist". New strategies will mean rethinking a lot of current assumptions, which is a bit beyond a politician like BoJo.


Chris said...

The document you link to points out the FFS would not stop rises just lessen them. If the government wants to lessen the cost of motoring they should invest in non-fossil fuel alternatives.

AdamB said...

How appropriate. I think I'll use "FFS" as an abbreviation from now on when referring to this idea.

Anonymous said...

David Cameron promised to bring in a Fuel Stabiliser if elected. The Coalition has tried successfully so far to avoid bringing the Fuel Stabilisr in but the Coalition realise that this issue has the potential to bring the Government down because it will more than likely make people protest and strike and escalate to other ares's creating more unrest. Boris Johnson see's his opertunity to be Mr Nice Guy the Conservative Mayor for London because he needs the public to think that he is a Knight in their defence because there is The Mayor for London Election in 2012, how convenient. What a Vote Winner. The Tories need to keep a Conservative Mayor in London to save face and with or without Boris Johnson they will have to bring in a Fuel Stabiliser as promised otherwise there is deep trouble for them. The Tories cannot afford to break this promise. Mark my words.

Anonymous said...

What should have been pointed out more clearly is that the Coalition will have to rob Peter to pay Paul to make this work when they are finally forced to keep their promise and introduce the Fuel Stabiliser. Mind you this Coalition could do with some serious Stabilising it's self and soon !

Anonymous said...

The Tories have made sure they have forced more people on the roads (as usual) so they can milk the cash cow as allow top end earners and businesses tax breaks....
Now...The Fuel stabiliser was an election gimmick, but with their banking pals speculating with hedge funds on the Brent Crude price, it's now left a mess on their faces.
They would dearly love a stabiliser to take the heat off of them, but with the bankers betting on the crude price it is hitting the $100 mark. OPEC are claiming that the price is way to high and there is plenty of crude and with the china-russia pipeline then the china usage excuse is not valid.
Anyway, back to stabiliser.....not at this they will have to set a ceiling for the cost at the pumps and that is the reluctance....if they set a Top price, then they would need to justify amending it in the future.....the best option is to cut duty as crude rises.... percentage rise, maybe on a month to month basis....but again a "target" number would have to be known. The condems are currently reaping the benefit for now of this windfall of extra revenue.....until we all Park up at least once a week, share lifts, cycle, only shop as needed etc all to cut down car journeys....if the 26 million cars did zero journeys once a week.... then think of the impact - lost revenue...lost fuel least 26 million litres of fuel not used....

Anonymous said...

This is a really, really bad idea - the last thing we want is to hook the government budget to the price of oil. Countries that subsidise oil use more of it, less efficiently, and every time the price surges, their budget deficit blows out. And - ask Mahmoud Ahmadinejad - it's very hard to stop once you've started even if you have the powers of a dictator. Doing this would basically surrender control of economic policy and energy policy all at once.

Conspiracy theory: knowing that oil is unlikely to be cheap ever again, George Osborne wanted this in order to keep the budget permanently critical and crowd out everything else.

Anonymous said...

Some good points from Hamish and some better ones in the comments.