Sunset for Treasury’s fuel price pledge
Days after freeze on duty, oil producers are set to put up the cost of crude
OIL cartel Opec is poised to agree cuts to production this week, undoing at a stroke Philip Hammond’s attempt to keep a lid on petrol prices at the pumps.
The Chancellor froze fuel duty in the Autumn Statement last week at 57.95p per litre, the level it has been at for more than five years, reckoning that the economic activity generated by keeping fuel prices low would bring in more tax. A freeze in oil production could change all that.
Brian Madderson, chairman of the Petrol Retailers Association, said: ‘The Chancellor was far too timid in freezing duty. He should have cut it. The Treasury has had a tax windfall from increased fuel volumes and VAT as the price of fuel went up. Its own reports have shown a cut in fuel duty would have a beneficial effect on the economy and tax generation. If Saudi Arabia cuts production, the price of Brent Crude could head to $60 a barrel by the New Year.’
A provisional agreement to cut production was made at an Opec meeting in Algeria in September. But members of the Organisation of the Petroleum Exporting Countries have wildly differing agendas so agreement has proved elusive and this week’s deal at the organisation’s headquarters in Vienna could yet fall at the final hurdle.
Saudi Arabia is understood to be keen to boost oil prices ahead of next year’s planned partial flotation of state-owned Saudi Aramco, the world’s biggest oil company, worth an estimated $2trillion (£1,500billion).
But Iran, which has only just seen Western sanctions relaxed, has reason to keep pumping to make up for lost time. Iraq wants all the oil revenue it can get to continue its fight against IS.
Then there is the Trump factor putting added pressure on Opec not to cut production. Donald Trump has vowed to cancel ‘job-killing restrictions on production of American energy’, including shale oil. Experts reckon this will eventually lead to more drilling on federal land. So Opec, of which the US is not a member, might continue to defend market share. At present, Opec aims to cut production from 33 million barrels a day to 32.5million. It produced 33.64 million in October and is on course to produce 34.5million in November. Investment bank Jefferies said: ‘Opec rhetoric is losing ground to the realities of the physical market. The probability of Opec meeting a production target of 32.5million to 33million barrels a day is shrinking as output from Libya, Nigeria, Iraq and Iran pushes higher.’ Saudi Ara- bia’s aim in producing record amounts of oil was to boost its market share at a time when the US shale oil revolution – which has seen the use of fracking to access oil in rock – was putting traditional oil producers under intense pressure.
The effect was dramatic as the price of Brent Crude, a global benchmark, fell from $110 a barrel in the summer of 2014, when IS threatened oil fields in the north of Iraq and even Baghdad, to $47 today.
A senior oil industry executive said: ‘All the international oil firms are going through a programme to rebalance finances to manage in a low-price world, which means cutting expenditure and costs, and selling unnecessary assets.
‘Most of us are hoping we will be able to get back to near normal at an oil price of $50 to $60 a barrel.’
Low prices have led the world’s leading oil firms to slash investment. BP’s will fall to about $16billion this year, down from an earlier forecast of $17billion to $19billion. Shell said its capital spending would be $29billion in 2016, almost 40 per cent less than the combined investment of Shell and its new acquisition BG Group just two years ago.
The drop in the oil price was reflected at the pumps, as the price of a litre of petrol fell from more than 130p per litre to 114.7p per litre last week, with diesel at 117.42p a litre, according to official figures.
Opec is an opaque group, and reports this weekend that the Saudis had refused to meet non-Opec nations ahead of Wednesday’s main meeting saw the oil price fall slightly on fears that no agreement would be reached.
Two years of cheap oil has indeed seen Saudi Arabia increase its share of the world’s oil market, but only just and it has lost share in nine out of the world’s 15 top oil markets.
A fall in the oil price is sometimes described as like a free tax cut, as consumers spend the saved money on other goods and services.
This week in Vienna, however, all that may just be about to change.