Budget 2011: Fuel duty cut plan earns oil industry ire

Man filling petrol
Image caption Soaring motoring costs burden both private individuals and companies

Motoring costs should fall for families and businesses as a result of fuel duty changes announced in the Budget.

Chancellor George Osborne announced a 1p per litre cut in fuel duty, effective from 1800 GMT, while also cancelling a fuel duty escalator and delaying other planned duty rises.

But he got a cool reception from the oil industry after saying the cut would be funded by taxing North Sea oil more.

Meanwhile, shadow chancellor Ed Balls blamed rising VAT for high pump prices.

"The idea that drivers around the country should be grateful for a 1p cut in fuel duty when George Osborne's VAT rise is adding 3p to the price of petrol is laughable," Mr Balls said.

Escalator cancelled

The moves by Mr Osborne come in response to a recent surge in global oil prices.

As well as cutting fuel duty this year, he said that an inflation-linked rise in duty planned for next week would be delayed until next year.

He also scrapped the fuel duty escalator, which was initially introduced by the previous government.

"The fuel duty escalator, that adds an extra penny on top of inflation every year, will be cancelled," he said, "not just for this year, or next year, but for the rest of this Parliament".

Under the old system the fuel duty would have risen by the rate of inflation, plus 1p per litre.

Instead, the fuel duty will fall by 1p per litre.

"We will delay the inflation rise in duty planned for next week until next year - and also delay the April 2012 inflation rise until the following summer."

"It's about doing what we can to help with the high cost of living and the high cost of oil," the chancellor said.

Oil firms taxed

The cut will be financed by taxing the oil industry, Mr Osborne said.

"The price of oil has risen 35% in just five months," he said. "Oil companies are making unexpected profits."

Hence, he would introduce what he described as a "fair fuel stabiliser".

"From tomorrow the supplementary charge levied on oil and gas production will increase from 20% to 32%," he said.

This, he said, would raise an additional £2bn ($3.3bn).

"I don't want important investment in the North Sea lost," Mr Osborne continued.

Hence, "if the oil price sustains a fall below $75 - and we will consult on the precise figure - we will reintroduce the escalator and reduce the new oil tax in proportion".

In other words, there would be no fuel duty escalator when oil prices are high, and no additional oil tax when oil prices are low, he explained.

North Sea tax burden

But the plans were given a cool reception by the petrochemicals industry.

"This tax hike could have a chilling impact on future investment in the North Sea," said Mark Hanafin, managing director of Centrica Energy.

"With more than 50% of Britain's gas now imported, it is vital for our energy security and for the economy that investment is maintained to ensure we extract all of the untapped hydrocarbons we can."

The government was backtracking on a promise given at the previous budget, nine months ago, to deliver a stable tax regime which provided certainty for investors, according to Malcolm Webb, chief executive of Oil & Gas UK.

"The industry is shocked to now be hit by a tax increase that raises the tax rate to at least 62%, with some of the most mature and therefore vulnerable fields now paying up to 81%," he said.

"This change in the tax regime will decrease investment, increase imports and drive UK jobs to other areas of the world."

Mixed responses

Motoring organisations welcomed the changes in fuel duty.

RAC Foundation director Professor Stephen Glaister said: "Thirty-four million drivers will welcome this, as will hauliers."

AA president Edmund King said "this action has probably stopped a 'summer of discontent'".

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Media captionWatch: George Osborne announces changes to motoring costs

"For many it will be more important than all the other tax announcements put together," said John Lewis, chief executive of the British Vehicle Rental and Leasing Association.

But environmentalists disapproved.

"In the face of a global oil crisis, this Budget will increase the UK's oil addiction," said Andy Atkins, executive director of Friends of the Earth.

Wary consumers

Business leaders have warned about the effect of rising fuel prices on consumer sentiment.

"Fuel and fuel price inflation is playing its part in driving the pressure on customers' budgets," said Justin King, chief executive of supermarket chain and petrol retailer Sainsbury's.

"The consumer is very, very wary of the future."

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