Fuel tax: Respite from the relentless rise in fuel prices – for now

There was some relief for motorists after the Chancellor announced a surprise reduction in fuel duties alongside an expected delay in a planned rise due next week.

George Osborne reduced the duty by 1p per litre, with the measure taking effect last night. He also abolished the fuel-price escalator, put in place by the previous Government, which would have pushed up the duty by 1p plus the rate of inflation next week. The Chancellor kept the inflation element in place, but delayed the rise to the beginning of next year, meaning the duty will rise by around 3p per litre in January.

In the absence of the measures, prices would have risen by almost 5p at the start of April. "The price of petrol has become a huge burden on families," the Chancellor said. "In the past six months, the cost of filling up a family car such as a Ford Focus has increased by £10," he added. He highlighted the impact of the prevailing unrest in the Middle East, which has driven world oil prices to within striking distance of the $120 per barrel mark from under $100 per barrel at the start of the year. But will the changes in yesterday's Budget make any difference? In the short term, Mr Osborne's biggest problem is – by his own admission – beyond his control. The Government does not have any say over the commodity markets and oil prices could continue rising.

In fact, some in the City fear a spiral to $200 per barrel or higher, which would prove ruinous, not just for drivers, but it would seriously imperil the already fragile economic recovery.

The Automobile Association (AA), while welcoming the fuel duty cut, highlighted exactly that risk. "With jittery stock markets and tensions in North Africa pushing the oil prices back into the $115- to $120-a-barrel price range, pressure on pump prices and inflation could grow again," the association's president Edmund King said. "After all, petrol prices were 5p a litre cheaper only as far back as the end of January."

Moreover, the Chancellor's room for manoeuvre is constrained by the state of the public finances. Petrol prices stood at around £1.33 per litre on Tuesday. Of that, fuel duty accounted for around 58.95p and VAT accounts for 22.25p, according to the AA.

The Treasury also imposes a 1.5p tax on the 3 per cent of biofuels that go into a litre. The Treasury needs this revenue, so while the Chancellor crowed about the reduction at the pump, he was also preparing a bill for oil companies in the North Sea. They benefit from rising oil prices so, to make up for the cut in fuel duty, the Treasury will raise the taxes they pay.

"The North Sea Oil tax regime was most recently changed in 2006, when the price of oil stood at $66," MrOsborne said, announcing that the supplementary charge on oil and gas production will rise from 20 per cent to 32 per cent, raising £2bn for the Treasury.

This "fuel tax stabiliser" means that while oil companies must cough up when oil prices rise, their taxes will fall back if oil prices slide below a set price. The catch is that, at that moment, the fuel-price escalator at the pump, that Mr Osborne said he was abolishing, will make a reappearance.

The oil industry is unhappy, and warned the measures ran "counter to the Government's stated desire to promote growth, jobs and exports".

Malcolm Webb, chief executive of the offshore industry group Oil & Gas UK, said the new tax may also"increase the country's dependence on imported oil and gas and thusdiminish security". Still, for now, this is good news for drivers.