Lowering the price of petrol and diesel

Ormolu17

Thanks to those of you who answered my previous post.  It was very helpful.

I have an idea that I have been pondering for some months now, and I would welcome comments from an economics expert ...

I firmly believe that the current massive increase in the price of energy has been caused by the way in which UK energy prices are tied to the world market prices.  

The North Sea produces more than 50% of all the North Sea Gas and Brent Crude that we currently need, so the Chancellor has an opportunity to disconnect from world prices and set a lower price within the UK.

The price of oil produced in the North Sea (Brent Crude) is currently trading at around $120 per barrel.  Two years ago it was trading at $40 per barrel and the oil companies were making a profit at that price.  Therefore, the oil companies are awash with excess profits of more than $80 per barrel.  Meanwhile the UK refineries have no option other than to pass on the price increase to their customers.  The planned windfall tax will not solve this problem, because it will not reduce the price paid by the refineries.

Let me suggest how this problem could be solved.

Given that all the North Sea oil producers have operating licences issued by the UK Government, suppose the Government added a clause to their licences requiring them to sell all their output to UK refineries at a fixed price of (say) $60 for the next 12 months.  This would give them a fair, but not excessive profit margin.  In return for the privilege of buying oil at half the current world price, the UK refineries would be required to sell all their products within the UK.  Any oil product sold outside the UK would be hit with an export tariff of 100%.  This would lower the cost of petrol and diesel to levels not seen since 2020 and keep them there for the next 12 months.  

The price of North Sea Gas could be controlled in the same way, which would be of great benefit to everyone who uses gas for their central heating and cooking.  It would also benefit the gas-fired electricity generators and companies that use gas or electricity to produce products such as steel and cooked foods.

In the UK, the energy regulator OFGEM currently sets the price cap for gas and electricity and they have recently been forced to raise the energy cap to a level that is hurting most families.  Furthermore, they have just predicted another massive increase in October.

If OFGEM was given the power to set the UK internal price of oil and gas in the way that I have described, then this would allow OFGEM to lower their energy caps instead of raising them.

Thinking further ahead, it would give the UK Government a mechanism for controlling the way in which our society weans itself off fossil fuels.  At the moment we are not fully self-sufficient, so it would only be a partial solution, but if the country could convert away from oil and gas linearly over the next 16 years we should be self-sufficient after about 8 years and we could then control the rundown phase to “net zero” over the following 8 years.

What do you think?

wittynamegoeshere

Are you under the impression that the government acts on behalf of the people?  If so you're going to be very disappointed when you work it out.

Big business makes donations to the parties, who then hand your cash to them.  The rest of it is all pretend - say a few words about cracking down on something then do nothing.

If you're unhappy with Party A then you can vote for Party B next time, they'll be no different so you'll vote for Party A again.  Rinse and repeat.

Uxb1

Ormolu17 said:

  Two years ago it was trading at $40 per barrel and the oil companies were making a profit at that price. 

No they were not
Two years ago Shell made a £ 16Bn loss due to the drop in demand and drop in oil prices.
They still had all their fixed costs to pay - hence the loss.

BUFF

The type(s) of oil that come out of the North sea are not suitable to be used for everything so we would still need to buy in some oil from (& indeed sell out to)  the global market.

Energy companies will not reinvest if they believe that their funds will get them higher returns elsewhere.

You would also risk trade wars/penalty tariffs with other countries with them citing anti-competitive behaviour/illegal support if industries were able to undercut global market prices because of the much cheaper energy.

Ectophile

North Sea oil and gas are both running out.  There's not enough of either left to supply the UK's needs, so as each year goes by, we import more and more oil and gas from overeas.

Good luck trying to tell those overseas suppliers that they have to sell to us at the UK's capped prices.

QrizB

Ormolu17 said:

I have an idea that I have been pondering for some months now, and I would welcome comments from an economics expert ...

What do you think?

State subsidies of commodity prices tend not to end well.

wittynamegoeshere

If we were to say that we won't buy anyone else's oil again then they might say that they won't buy our cars and/or whisky, financial services or anything else.  In other words, we've just started a trade war and, as a small single country, we would definitely lose far more than we would gain.

The sugestion made is that the govt controls the price and/or production of goods, which is basically communism.  For lots of reasons, I think I'm right in saying that no communist country has ever prospered in the long term.