Much discussion of fuel duty in the UK takes place outside the context of what has actually happened to fuel duty in recent years.  The following table gives the rates of duty on fuel since March 2001.

Duty rate per litre (£) from 7 March 2001 0.4582
Duty rate per litre (£) from 1 October 2003 0.471
Duty rate per litre (£) from 7 December 2006 0.4835
Duty rate per litre (£) from 1 October 2007 0.5035
Duty rate per litre (£) from 1 December 2008 0.5235
Duty rate per litre (£) from 1 April 2009 0.5419
Duty rate per litre (£) from 1 September 2009 0.5619
Duty rate per litre (£) from 1 April 2010 0.5719
Duty rate per litre (£) from 1 October 2010 0.5819
Duty rate per litre (£) from 1 January 2011 0.5895

A further 1p rise plus inflation is scheduled for April 2011, expected to take duty to 61.66p.  Consider what that will mean.  In the seven and a half years from March 2001 to November 2008, fuel duty rose three times, and it increased by about 10%.  In the two and a half years from November 2008 to April 2011, fuel duty will have risen seven times, and by more than 22%.  In essence, over the past two years, we have introduced an extremely aggressive fuel duty escalator, but without debate or fanfare.

The latest rises come, perversely, at a time when oil prices are rising rapidly.  Oil price rises accelerated particularly following the introduction of the Federal Reserve's second phase of quantitative easing, which has sparked off late-phase unsustainable booms across many parts of the developing world and (as global monetary ease is wont to do) driven up many commodity prices.  This movement is now exacerbated by political risk (itself not unrelated to the commodity price spikes, because general inflation and high food prices are factors in the discontent in many regions) with oil prices spiking again in the past few days with Libya's apparent descent into civil war and concerns about problems in Bahrain spilling over into Saudi Arabia.

Oil price spikes on this scale have the potential to significantly impair US and Eurozone growth.  (Effects on the UK are more ambiguous because of North Sea oil.)  And of course they are likely to have an impact on UK inflation, potentially driving CPI inflation up from the 5% recently forecast to the 6% level I suggested some time ago that the Bank of England would struggle to hold as a peak.

Adding a huge rise in fuel duty on top of the impact of oil price rises seems like odd timing.  The old 1990s idea of the fuel duty escalator was supposed to be that of a green tax, providing incentives to explore alternative technologies.  But that was in an era when oil prices sat at $10-$30 per barrel.  Are such incentives really required in the same way with oil prices of $110 per barrel?  If the objective is environmental, and noting that oil price movements can be significantly affected by issues such as political risk, doesn't it make more sense if fuel duty rises occur when oil prices are low, rather than high?

George Osborne is reported to be still considering introducing a fuel duty stabiliser – a mechanism whereby fuel duties rise automatically as oil prices fall and vice versa.  I still believe that it can be made to work.

7 comments for: Andrew Lilico: What’s happening to fuel duty?

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