Oil Market Report January, 2011

Prices stabilised in January, giving consumers some respite from the previous big rises in December. But in comparison to last year, the issue of high fuel prices is now rarely away from the headlines and one subject that has been the subject of much interest is the Government’s proposed fuel-price stabiliser (FPS).

For those unaware of the proposal, the plan is to reduce fuel duty (currently 58.95p per litre on petrol and diesel) as crude oil prices rise and increase duty when crude oil prices fall. The logic behind this is that it gives price stability, whilst also ensuring continuity in revenue collection for the UK Government. The reason for the latter is that as crude oil prices rise, so do tax revenues from North Sea operators. When crude oil prices fall, then tax revenues reduce, so duty has to increase in order to bridge the gap.

Sounds reasonable, but what are the practicalities of such a scheme? Portland tends to believe that “where there is a will, there is a way”, but how big is the Government’s will? Because the FPS faces some formidable challenges and here are some of them:


1.Consistent revenue collection is crucial to the UK Government at the present time, but this is virtually impossible with the FPS. There is no easy measure to equate an on-going tax that raises money on a pence per litre (ppl) basis, versus a corporation tax that raises money on annually declared profits. This presents a possible giant cash and cash-flow problem for the Treasury.

2.Duty is a “stay-at-home” tax, ie, the revenue from duty will always exist as long as UK consumers buy fuel. North Sea taxation on the other hand is reliant on many international oil firms, all of whom can up-sticks and register elsewhere, if the taxation environment is not to their liking. This could leave a very nasty financial black-hole for the Treasury.

3.The scheme could be ruinous for wholesalers (and therefore consumers) of fuel. The following example illustrates this:

  • I am a fuel wholesaler and I buy £2m of fuel which the government decides is to be worth £1.9m as of tomorrow as a result of a duty rate reduction.
  • How am I going to get that £100K back? The only thing I can do to avoid significant financial loss, is raise my prices to the original level, thus negating the duty reduction.

4.Crude Oil prices do not equate directly to fuel prices. Exchange rate plays an equal (at the moment more significant) part in dictating pence per litre prices. Will the Treasury have an escalator on exchange rate too?

5.If prices drop massively in (say) a quarter, then the Government might put on 2ppl duty. However, what happens if prices immediately bounce back in the next quarter and we have a price spike in the markets (quite a feasible scenario). Within a week, consumers could be paying 4ppl-5ppl more for their fuel.

6.Finally, where is the starting point? What is defined as a high price? High prices today may be the norm tomorrow / next month / next year, so at what point does the duty rate hit zero? $150 per barrel? $200? Looking at when crude prices fall, will there be a maximum cap on duty and will future Governments adhere to this cap, when times are tough? I think we all know the answer to that one!


1.Her Majesty’s Revenue & Customs (HMRC) are still not fully integrated after the merger between Inland Revenue and Customs & Excise 5 years ago. Portland has experienced nothing in HMRC or other Government departments that tells us their IT systems are ready for such a programme without significant change and investment. In fact, the introduction of RDCO (registering Red Diesel sales) took years to implement and involved much less national volume. Nor does RDCO cover the even thornier issue of concurrent government duty rates.

2.How often will the FPS change? Every week? Every month? Every Quarter? And will it be applied retrospectively? For it to be relevant and cover price spikes, then it will need to be changed frequently and therefore the ongoing / constant workload will be at its greatest – pricing, sales, accounting, invoicing, VAT will all have to change on a frequent basis. Not just for oil companies, but wholesalers, distributors and retailers of fuel.

So without wanting to fill several more paragraphs with further potential problems, the conclusion is that the FPS scheme has not been thought through in sufficient detail. Far be it from Portland to suggest that the FPS was put together by a set of people with no experience of the real world and we would also never suggest, that the policy was dreamt us a populist sop to garner votes in the run-up to a General Election, with no intention of implementing it, once the voting was done and dusted. Instead, Portland simply feels that the FPS is a massive task that will find the Government will wanting. On that basis, we conclude that businesses need stability to manage their operations, not gimmicks. So Cameron and Osborne should either a) cut duty b) freeze duty or c) leave everything as is and stop making promises that can’t or won’t be fulfilled.