Tuesday, January 06, 2015

Oil and taxation

So the price of Brent Crude goes down.  And every one is saying this is terrible.  Except when you go to the petrol pump and discover that petrol is now 20% less that it was a month ago.  So is the drop in the price of Brent Crude good or bad?  Well, it depends where you stand. 

For you and I it means we have more money in our pockets to spend as we see fit.  Which ultimately creates jobs in the productive private sector.

For the Government, it means less tax revenue.  Or does it? Despite George Osborne’s best efforts, petrol retailing remains a joint venture between the taxman and the private sector, with the latter merely a minority shareholder.  As a result, one ought to expect only a small proportion of any fall in the price of oil to filter through to the cost of petrol.

To illustrate what happens, let’s go back to when the price of a litre of petrol was around £1.33 – in other words, before the prices fell.  At the time, duty accounted for 58p, VAT for 22p, the companies that supplied the crude and refined it got 48p and the distributors (the petrol stations and trucks) got just 5p.  Since then, the price of petrol has dropped by 9p, almost all of which has been absorbed by the private sector and very little (bar a dip in VAT) by the Treasury.

The Treasury is still collecting 58p from duty, its take from VAT has dropped slightly to just under 21p, the oil companies get just over 40p (which means that their revenues are down by around 17pc) and the retailers still make as little as 5p.  Needless to say, none of these figures include the massive tax that the Government grabs on oil companies’ profits.

So what does this mean?  Well it means on current pump prices, tax accounts for 63.4pc of the money handed over by you at the petrol station.  This is a ludicrously high percentage.  Can you imagine that level of tax on any other product that you buy?  Yet it is the politicians who are taking the moral high ground, and pinning the blame for high prices on the private sector.   

The stark reality is that even if there were collusion of some sort – a point entirely unproved – the worst case scenario probably would be that prices are 1p-2p too high some of the time, a trivial problem compared with 79p “overpricing” caused by taxes.

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