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24 March 2011

Is George Osborne right about the North Sea tax?

Labour argues that the windfall tax could be passed to customers – but this is not an effective line

By Samira Shackle

George Osborne has said that the new windfall tax on oil companies will not be immediately passed on to motorists in higher fuel prices.

The Chancellor announced a £2bn levy on North Sea oil producers in yesterday’s Budget to pay for a cut in fuel duty.

Labour’s attack line was that there was nothing to stop oil companies from increasing prices and passing on the tax. The shadow chief secretary to the Treasury, Angela Eagle, made this case on Newsnight last night, while Ed Balls also criticised the move, asking on Radio 5 Live: “Will this immediately be passed back to customers?”

On Newsnight with Eagle last night, Danny Alexander argued that this would not be the case because petrol stations buy their oil on the global oil market, which is unaffected by the firms in the North Sea.

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This morning on the Today programme, Osborne reiterated this point:

We’ve got an international oil market. The petrol that you put in your car doesn’t just come from the North Sea, it comes from the Middle East, Russia and so on.

How confident can they be? Over at PoliticsHome, Paul Waugh has dug out the source of this information – a regulatory impact assessment carried out in 2006, the last time there was a tax rise on North Sea oil. This document says:

Oil companies are price-takers, facing a globally determined market price for their output, and so will absorb all costs. They will be unable to pass any costs on to consumers, and the impact will be distributed proportionately across producers with no adverse effects on competition.

It looks like Osborne is safe on this one, with another Labour line of attack stymied (ensuring that the banks would not benefit from the cut in corporation tax was another skilful move).

However, this certainly does not mean that the policy is watertight. Both Balls and Ed Miliband have pointed out that the penny cut in fuel duty is meaningless, given that the VAT hike in January already added 3p to the cost of petrol.

Waugh also notes that punters were complainin this morningg that petrol stations put prices up yesterday morning before taking a penny off last night. Osborne said he would be watching retailers “like a hawk” to stop any “funny business”. He better get watching.