UK tax on fuel producers takes from the rich and gives to the poor

Redistributing the money from oil companies, whose profits have risen because of surging crude prices, into the 'hands of families' was an 'economically smart' thing to do, Britain's chancellor George Osborne said.

"When it costs £1.30 for a litre of petrol, £80 [Dh470] to fill up a car, I know people feel squeezed," George Osborne, the UK chancellor of the exchequer, said before the budget. "I will do what I can to help."

The chancellor fulfilled his promise by reducing pump prices by 1 pence immediately, suspending a 4 pence rise in fuel duty from last Friday and scrapping the fuel duty escalator.

The problem is, there is no money in the kitty for such a gesture, small though it is. So Mr Osborne turned to those who seem to be the only ones making money these days - the UK's gas and oil producers. In a shock budget announcement last week, he increased the supplementary charge on North Sea oil and gas production from 20 per cent to 32 per cent to raise an extra £2 billion a year to fund the fuel duty cut.

Redistributing the money from oil companies - whose profits have risen because of surging crude prices - into the "hands of families" was an "economically smart" thing to do, Mr Osborne said.

The chancellor's grit in sticking to Plan A, staying on course with the £111bn austerity measures announced in the emergency budget last year, has been widely hailed by the business and financial community. His new investment rules have been heartily welcomed by "angel investors", those who help start-up companies, as a "shot in the arm" for enterprise.

The government's initiative has the backing of leading names including Barclays, Google and the Virgin Group head Sir Richard Branson, one of the UK's most successful entrepreneurs. Motorists and their lobbies, such as the Automobile Association, have welcomed the fuel duty cut. Economists and commentators are in agreement with the government that it is a pro-growth, business-friendly budget.

Not so, cry the North Sea energy producers. The new tax will cost the country tens of thousands of jobs, cut production and pose a threat to energy security, the lobby group Oil and Gas UK warns.

"What you see is the UK's reputation as a global player in oil and gas industry falter because of this," Mike Tholen, the trade body's economics director, told the BBC. "We will see jobs go and we will see technology lost, and we will undoubtedly see our nation less well off when it comes to energy security because of the tax change."

The charge on oil and gas was introduced in 2002 by Gordon Brown, the Labour chancellor of the time, at a rate of 10 per cent, which rose to 20 per cent in 2006. The latest rise lifts the overall tax rate on UK fields to at least 62 per cent, and as high as 81 per cent for some of the oldest. A big jump in the tax rate in a decade, one might think. Then again, compare this with the rise in oil prices: Brent crude was trading at close to US$115 a barrel yesterday; in 2002, it was just $20.

The oil giant Shell triggered a heated debate last month about the high cost of fuel on the UK forecourt after reporting a profit of £11.5bn last year, almost double the amount it made in 2009. Over the fourth quarter alone, it made £3.5bn. ExxonMobil, the world's largest oil company, made £19bn last year. Its rival BP made a loss only because of the Gulf of Mexico disaster, which hit its earnings substantially.

What the industry is particularly unhappy about is that the increase appears to be a last-minute decision by the chancellor. Only nine months ago, in its first budget, the government assured the industry "it recognised the importance of a 'stable' UK oil and gas tax regime", which provided certainty for investors, said Malcolm Webb, Oil and Gas UK's chief executive.

Mr Osborne could take heart from Mr Brown's initial and subsequent raids on North Sea profits, which elicited the same protests and threats from the industry. The companies, and their profits, are still there.

The uncertain fiscal regime and dwindling reserves might be a reason for big companies such as Exxon, Shell and BP - which are looking to reduce exposure to the North Sea - to speed up their divestments. Geologists believe there are still billions of barrels left in smaller deposits, so any move by the big boys may create opportunities for second or third-ranked British energy companies such as Premier Oil and EnQuest, which are looking to buy North Sea assets.

This is also a likely boost to government claims of putting British interests at the forefront.