Rising gas petrol prices cause problems for UK government’s Keir Stormer

Welcome to this week’s CNBC UK Exchange. Few issues are more troubling for the British government than the cost of filling up a car. No government has dared to scrap fuel duty, introduced on a “temporary” basis 15 years ago, which has cost the exchequer tens of billions of pounds in foregone taxes and put a huge strain on public finances.

The reason for this reluctance goes back more than a quarter of a century – to a time when some of the current cabinet were still in school.

The sensitivity of American consumers toward high gasoline prices is well known.

Yet petrol costs are also very important in Britain – and will be a problem for Prime Minister Keir Stormer’s government if the Iran conflict drags on.

Starmer and his chancellor (finance minister) Rachel Reeves have made cutting the cost of living their top priority and, before attacking Iran, were confident of making progress.

As of February 5, when it publishes its latest quarterly inflation report, the Bank of England expects consumer price inflation (CPI) to fall to 2.1% in the second quarter of this year – slightly below its target rate.

A rise in crude prices caused by the Middle East conflict will increase it and put further pressure on public finances.

Stormer has already announced a £52.4 million ($70 million) package to support “vulnerable” households – a third of them in Northern Ireland – hit by rising heating oil prices, which, unlike gas and electricity, are not covered by energy regulator Ofgem.

But rising petrol and diesel prices are a big problem. In September 2000 former Prime Minister Tony Blair’s government, now as big as Stormer, was haunted by shocking incidents as farmers and porters blockaded refineries and fuel depots amid anger over taxes on petrol and diesel.

Shortages quickly followed, resulting in school closures, rationing and postponement of operations and postal deliveries in supermarkets.

Chancellor Gordon Brown responded by cutting duty on ultra-low sulfur petrol, freezing duty on other grades of motor fuel, putting more vehicles into a lower vehicle excise duty band – a tax cut for most lorries – and taxing foreign truckers using British roads.

The protests were sparked by tax hikes aimed at tackling climate change due to the fuel price escalator, under which fuel tariffs rise annually by more than inflation.

Introduced in 1993 at inflation + 3%, it was at inflation + 5% when Blair was elected in 1997, before Brown increased it to inflation + 6% in March 1999.

This means that when fuel protests erupt, government taxes (value added tax added on top of fuel duty) are more than 80% of the price of a liter of petrol.

George Osborne, Brown’s successor-but-one, scrapped the escalator in 2011 and cut fuel duty by a penny a liter before freezing it. Subsequent chancellors, terrorized by an angry “white van man” (a catch-all for self-employed businessmen), then cost the Exchequer £6 billion annually, according to the independent Office for Budget Responsibility.

Chancellor Rishi Sunak temporarily cut fuel tariffs by 5p a liter in 2022 after Russia invaded Ukraine, but Reeves had planned to phase them out after September, before the attack on Iran. That seems unlikely now.

Meanwhile, Reeves and Energy Secretary Ed Miliband have infuriated petrol retailers with accusations of profiteering, some ironic that government taxes still cover around 57% of petrol costs but retail margins rarely exceed 6%.

The Petrol Retailers Association last week temporarily abandoned talks with the pair after complaining their “inflammatory” language – which saw Miliband accusing them of “price gouging” – led to some employees facing abuse from customers.

RAC, the breakdown services and motor insurance provider, said with oil at $100 a barrel, petrol was heading for 150 pence a liter – a level not seen since June 2004 – while diesel was hitting a three-year high of 180 pence.

The price hike poses a dilemma for the Bank of England, which was expected to cut interest rates this week, ahead of the strikes on Iran, but is now unlikely to do so.

For the ministers, some of whom still remember the events that unfolded while still in school, it is even more toxic.

– Ian King

The UK economy failed to grow in January ahead of an energy price shock from the Iran war. The fresh figures show evidence of a fragile British economy, which is now under further pressure following the start of the US-Iran war.

Russia’s UK ambassador says US ‘adventurer’ in Iran has no clear exit strategy. Russia’s ambassador to the UK, Andrey Kelin, told CNBC that Russia shares “a lot of sympathy” with Iran.

Social media giants urged to tighten child safety after UK rejects blanket ban on teenagers Regulators are calling on social media giants to enforce stricter protections for children on their platforms after lawmakers rejected a blanket ban.

– Holly Elliott

March 19: Bank of England monetary policy decision

March 19: UK unemployment rate for January

March 24: UK PMI data for March