Comment: Wanted – a tax break for lower fuel costs

It warns that petrol pump prices could rise by 5p a litre over the coming weeks. A surge in the wholesale cost of petrol across Europe has already led to a rise in UK petrol and diesel prices, with more misery possibly to come.

Brent crude has climbed from below $100 a barrel in April to almost $109 today. UK petrol prices have been climbing while diesel has gone up from 139.16 pence per litre (ppl) a month ago to 140.24ppl now. According to the AA, a $100-a-tonne increase in the cost of petrol across northwest Europe, combined with a weaker pound, heralds a potential 5ppl increase in pump petrol costs. Meanwhile Scotland and East Anglia are already the most expensive areas in the UK for diesel, both averaging 140.8ppl.

Now how odd it seems that with an economic growth rate less than half that of five years ago, recession across much of Europe and worries over a China slowdown, we should be faced with higher energy costs. It is a sharp reminder that the biggest obstacle to recovery is the high and rising cost of fuel. And there is every likelihood that, as colder climes set in, the cost of energy will become a major issue for households, business and the government. We urgently need a policy that addresses the downward drag that ever-rising fuel bills have on everything from industrial production to household budgets. Cancelling previously announced fuel duty rises doesn’t begin to address the challenge we face.

Key factors behind those higher petrol pump prices are the weakness of sterling, driven by ultra-low interest rates and the recent guidance by new Bank of England Governor Mark Carney that Bank policy is intent on keeping rates lower for longer. As oil is priced in dollars and the pound weakens against it, petrol here has become more expensive. Fuel tax and VAT combined already account for most of the cost of petrol.

But it is not just petrol prices that are giving grief. According to industry regulator Ofgem, household energy bills have climbed by £300 or 30 per cent in just three years – far outstripping the rate of wage inflation. The average annual wage of full- time employees in the UK rose by just 1.4 per cent to £26,500 in the year to April 2012.

The Ofgem report also predicted that gas and electricity bills will rise by £95 over the next 12 months for a standard tariff, dual fuel customer based on a current average annual bill of £1,420 a year. And despite those huge shale gas discoveries in North America, the bill for a typical gas customer bill is set to rise from £550 seven years ago to almost £850 over the next 12 months.

But it is the longer term outlook as much as immediate pending rises that give cause for concern. Last week the Office for Budget Responsibility (OBR), the body charged with providing economic forecasts ahead of UK budgets, has lowered its estimate of revenue from offshore oil and gas.

A key component of its forecasts, fiercely challenged by the SNP administration, is a fall in North Sea production. Now production forecasts – as much as forecasts for the price of oil itself – are a dark art. It gets all the darker when predictions stretch out years ahead. In its latest revision the OBR reckons that North Sea production will decline at a rate of 5 per cent a year – slower than the 7.8 per cent a year on average since 1999.

How so, asks the SNP. Scotland’s oil and gas sector is “going from strength to strength”, with investment in the North Sea projected to reach a record £13 billion in 2013 while planned total investment by companies is reckoned at some £100bn. That may be so – but output from existing fields is set to keep falling.

The most sensitive element in the OBR’s forecast is that for oil tax revenues between 2018 and 2041. This is now reckoned at £56bn against £67bn previously, or a fall from 0.7 per cent of GDP in 2011-12 to just 0.2 per cent of GDP by 2017-18, with long-term projections showing revenues declining to just 0.03 per cent of GDP over the subsequent two decades. Factors behind the decline include falling oil prices and a new regime of tax breaks for decommissioning. Given the significance of all this for the SNP’s independence campaign, it is little wonder it has mounted a fierce challenge.

It is against this background that the UK government has outlined plans to give tax breaks to companies involved in developing shale gas. It has proposed cutting the tax on some of the income generated from shale gas production from 62 per cent to just 30 per cent. This, it claims, would make the UK the “most generous” regime for shale gas in the world. Friends of the Earth has called the plan “a disgrace”. But for industry worried about brownouts and households fearful of ever-rising energy bills, shale gas cannot come on stream soon enough. Tax breaks helped to power controversial onshore wind farm development. Now it is the turn of shale gas.

However, generous tax breaks won’t by themselves address safety worries. And even if planning consents are given, it will be some years yet before shale gas comes on stream in significant quantities. What is needed is a range of tax incentives to spur energy efficiency and new energy technology driven by innovation and adaptation. All this may be out of mind in the current heatwave. It will be front of mind before we know it.

Twitter: @Bill_Jamieson