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CHRIS HUNT

27 June, 2011
Page 7 

In recent weeks there has been much debate in the media about pump prices and the speed with which reductions in crude prices are reflected on the forecourt.

Not surprisingly there is a great deal of strong feeling on the subject since nobody whether businesses or individuals relishes being faced with rising fuel costs. The fundamental issue is that the days of relatively cheap energy are over and we are now competing globally for energy resources with the rapidly growing economies of China, India, Brazil etc. China alone is forecast by the International Energy Agency to account for over 50% of the global increased energy demand by 2035.

On top of that the UK and the rest of the EU have committed to take a lead on tackling climate change and have set some challenging greenhouse gas reduction targets. Largely the cost of this commitment whether it be through the EU Emissions Trading System, Renewables Obligation, Climate Change Levy and carbon floor price, or Renewable Energy Directive and biofuels is hidden from consumers. Maybe the time has come to spell this out more clearly?

Of course, for government, it is a near impossible balancing act. It is worried about the competitiveness of UK industry faced with these extra burdens, which many of our competitors do not face especially in refining, and the effect upon jobs. But in reality it has little room for manoeuvre given the state of public finances and stated policy objectives.

The fuel duty issue is a case in point. The Chancellor scoops up about 33bn per year from fuel duty and associated VAT on road fuels. He needs the revenue and it is cheap to collect since the burden largely falls on fuel suppliers. There are enormous expectations that the fair fuel stabiliser (FFS) announced in the Budget will help. The aim of the FFS is to limit the duty increase to inflation only if a trigger price for crude oil of $75 average for the three months to February is exceeded; below that duty increases of 1ppl plus inflation are applied. However, in current plans, it seems that the mechanism will only be applied once a year to determine the ensuing year's duty rate.

UKPIA's initial analysis, applying this mechanism back to 2008, indicates that it will make very little difference.