27/06/08 - Petrol prices are high, because oil prices are high. But we have been reducing the tax component of petrol prices since 1999.

The problem requries global solutions: increased production in the medium term, and moving away from oil dependency in the long term.

I fully understand the depth of feeling on this issue, and would like to provide some context to what action the government is taking.

The price of petrol is determined by complex factors, many of which are outside of the government’s direct control. World oil prices have trebled in the last few years – rising demand from countries like India and China have pushed up the price. It is something which is affecting every country in the world.

Contrary to reports, the Labour government has actually decreased the proportion of tax on petrol by 17% since 1999 in real terms. While the price of oil has gone up dramatically, we have reduced the tax proportion of pump prices. In April, the Chancellor froze fuel duty in the Budget, and has pledged to look again at the issue in his autumn Pre-Budget Report to see if there is more we can do.

UPDATE 16/07/08 - The Chancellor has just announced that he will freeze fuel duty for the second time this year, offering even more relief to drivers.

If we had followed the Conservatives idea of the Fuel Duty Escalator, petrol would be 34p higher at the pump today. You just can't gimmick your way out of this problem.

It is not true that the government is getting a ‘windfall’ from the taxes on the high price of petrol, as some have suggested. As fuel prices rise, the government does not receive any additional revenues from fuel duty because it is a flat rate - in other words it is a fixed amount per litre. And as the price increases, demand drops off leading to reduced revenue for the Exchequer. Moreover, the high price of petrol has a great impact on consumer spending in other areas, resulting in reduced VAT receipts from other goods (and in any case, businesses are able to reclaim VAT on fuel).

We have to reduce our dependence on fossil fuels – we are building a new generation of nuclear power stations and we are increasing our generating capacity of renewable energy by tenfold (click HERE to read more). We are encouraging businesses to improve their energy efficiency through measures such as the Climate Change Levy, which not only saves businesses money but relieves price pressures by reducing demand for energy. The government’s green taxes on vehicles are encouraging most car owners to switch to improved mileage efficiency vehicles, further reducing demand for petrol. Now for the first time, sales of low-emissions vehicles outstrip those of gas-guzzlers.

But in the end, global problems require global solutions. That is why the Prime Minister recently met with Saudi leaders in Jeddah to discuss action to be taken by oil producing countries. We are asking the oil producing states to recognise our shared interests – states like Saudi Arabia need to spread their economic risk by investing in alternative industries. The Prime Minister secured an increase in the Saudi oil production output, and Saudi interest in investment in UK energy generation projects. In return Saudi Arabia will open itself to investment and expertise to seek out new production methods and explore new energy fields.

This will allow us to increase production in the medium term, while moving towards a non-oil economy in the long-term.

We are continually pushing for more co-operation from our international partners. We need an international energy policy that removes barriers to increased supply of oil and gas, and strengthens measures to reduce demand. The Prime Minister also raised this issue with European leaders at the European Council summit in Brussels on June 19th and 20th. We are improving fuel efficiency by pushing for an EU-wide target of 100g/km for car emissions by 2020, and at our urging the European Council is now exploring the implementation of infrastructure for electric vehicles.

As the most important global issue in the world today, this is a topic that the government raises at almost every international opportunity. We understand the problem and we are leading the world effort to tackle it.