As oil companies wallow in billions of pounds of profits, motorists are forced to pay near-record prices at the pump. Robert Powell looks at why...
Remember back in March when the Chancellor pulled that fuel price rabbit out of his (in all likelihood) velveteen, jewel-encrusted hat? Well I’ve got some bad news for you. It caught myxomatosis and had to be shot.
Yes, it seems that the grand finale of George Osborne’s budget, to put fuel back into the tank of Britain – a 1p per litre cut in fuel duty –clapped out before it even got off the drive, as fuel prices are now once again bordering on record highs.
According to the AA, at the end of July petrol prices were just 1p off their record high with unleaded sat at 134.40p and diesel at 140.73p a litre.
These latest price increases bring the cost of filling up an average car to a little under £70. Not a good development for cash-strapped families planning their summer getaway.
Are the spending cuts necessary? Was the budget fair? Robert Powell hits the streets to find out.
Some experts are predicting that prices will rise even further over the next few weeks. However others see the current record of 137.43p as something of an ideological barrier that no company would want to push past in the current climate.
A key reason why petrol prices are continuing to rise is the high cost of oil. Well, I say high – as I write this (4th August) the price of a barrel of light sweet crude has actually dipped to its lowest level since February. That’s not to say that $87.25 is not still a hefty price to pay for a barrel of the black stuff.
However ,it is the reason for this dive that demonstrates why oil prices keep petrol costs high – namely, excessive speculation on the part of traders.
Jitters in the US economy and a falling dollar, brought on by Obama’s last minute ‘compromise’ on the US debt crisis, has spurred on traders to sell off their oil – pushing market prices down. In fact, most of these sales probably won’t even be made by human beings. Companies will now use computers loaded with complex algorithms to predict when to shift their supplies. From here, the sale will be made in a matter of milliseconds. No oil will actually change hands; it’s the price that matters, not the product.
This type of trading falsely inflates the cost of oil as it relies not on real life levels of supply and demand, but on speculation. As I reported back in March, there really was no credible threat of European oil supplies drying up as a result of unrest in the Middle East – but that didn’t stop barrel prices ballooning to near record highs.
So if speculative trading results in erratic fluctuations in the price of oil, why do motorists only ever see price hikes, even when wholesale costs are troughing?
Well, Paul Watters, Head of Public Affairs for The AA put it succinctly when he described the whole process as being like one long food chain where the motorist is sat at the end, consistently taking the hit as others profit.
Factor in that Shell, Exxon Mobil and BP all last month announced increased profits – up by billions in every case (what global recession?) - and it’s not hard to identify the predators sat at the top of this chain.
Ed Bowsher investigates how deep the recession could go, and takes a look at the prospects for the UK economy
Another key problem for motorists is the transparency of this food chain, or rather the lack of it. No one has any idea who is jacking up what price, taking what cut or swindling which body. And if no one knows this, then all the key players in this linear cartel can trot out the ‘not me guv’ card and blame each other. Take the defence offered by the head of Shell when asked about high petrol prices in light of his company's ballooning profits; (to paraphrase) ‘blame the government, they tax the stuff.’
Well, in one respect, he does have a point.
If speculative oil trading keeps pushing petrol prices up, then taxation is what keeps it high. Around 70% of the price you pay at the pump is government-levied tax. Granted, the nice Chancellor did cut a penny off fuel duty earlier this year – but he did also jack up VAT. One step forward, two and a half steps back indeed.
Campaign group FairFuelUK were a key force behind the March fuel tax cut, and now they have their sights set on axing the planned January duty rise. The group argues that the current high level of fuel duty is not only hitting motorists in the pocket, it’s also costing the government in the form of lost tax revenue.
It’s all to do with a theory formally known as the Laffer curve. Put simply, the curve says if you pump up the price of petrol through excessive taxation then no one will buy it, and thus your tax intake will decrease.
And it certainly seems to ring true. Recent figures show that the Treasury now receives £637 million less in revenue from petrol taxation than it did three years ago. And that’s despite fuel duty being pegged at a lower level back in 2008.
What to do
FairFuelUK’s aims are pretty straight forward. Firstly, stop any rate rises for the remainder of this parliament. Secondly, bring petrol taxation levels down as a whole. And thirdly, introduce a mechanism that will fairly offset oil price rises at the pump, so as to ensure that motorists are not left out of pocket as a result of speculative trading.
How to pay for this?
Well, those £600 per second profits lapped up by North Sea oil companies are looking mighty ripe for a taxing, don’t you think?
But domestic legislative change is not the full answer. A light also needs to be shone into the world’s murky oil cartels. And through their lobbying of the competition commission to look into the shady practices of oil traders, the AA is attempting to do just that and should be commended.
The recent financial crash was brought on by the transformation of ‘things’ – most obviously people’s homes – into mere numbers; digits to be traded and profited from. The same must not happen with oil.
Next time George Osborne decides to pull a rabbit from his hat over fuel prices, he should make sure it has some claws.
Is this fair?
Who’s to blame for spiralling petrol costs? And what can be done to stem them?
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