Expert View : Oil is a soft target but it won't get Brown out of the mire

The temptation will be to call for a windfall tax. He should not give in to this quick fi

The real issue, as I have discussed many times on these pages, is the superficial nature of the UK growth story in recent years. From 1997 to 2003 the UK consumer had a strong boost to his cash flow from steadily falling interest rates; with over a trillion pounds of debt, all in effect at floating rates, the impact of changes in base rates is very marked (something that readers outside the UK underestimate). What was, to all intents and purposes, a tax cut outweighed Mr Brown's tax increases, providing a secondary engine for the UK consumer.

No longer. The peak for the UK came when the Bank of England started raising rates rather than cutting them, taking money out of consumers' pockets just as they faced higher national insurance and council tax and higher prices on things such as transport. The most recent cut will have helped consumer confidence in that the prospect of a steady set of increases has diminished, but the ultimate driver of expenditure is disposable income and this is under assault from all sides, and particularly from the Treasury.

With the UK budget deficit under pressure from too much spending, the temptation will be high to call for a windfall tax on oil companies, and many backbenchers were undoubtedly whispering in the Chancellor's ear at the Labour Party conference last week.

Mr Brown would be wise not to give into this quick fix. His experience with the stealth tax on pension funds should be at the forefront of his thinking here. Proof that there is no such thing as a free lunch, the raid on British pension funds was a textbook case of the law of unintended consequences: the UK has moved from having the best-funded pension system in Europe to being among the worst.

In its simplest sense, he is already yielding a significant windfall from the higher prices, via an increased take on fuel duty, VAT and corporation tax. One negotiating tactic for the oil companies is suggested to be that they follow the Ryanair approach and post petrol prices as 20p a litre, plus 78p government tax. Harsh, but fair, and politically unattractive to say the least.

More seriously, there is a sound economic argument for not imposing windfall taxes and it centres on the nature of the current problem with oil prices, or more specifically with petrol prices.

Crude oil will probably find it hard to move much above $70 for anything except the briefest spike, but the more politically charged area of petrol prices reflects other factors - in particular, the lack of refining capacity. In essence, the storms over the past year - not just Rita and Katrina, but also Ivan from last autumn - have exposed the bottleneck in the refining industry.

Turning crude into gasoline requires capacity, and much of this is set in the Gulf of Mexico. The US has not built any refineries since 1976, partly due to concern over future returns, but also because in recent years all the investment has gone into improving existing refineries to meet environmental regulations.

The solution to the current problems is more refineries, not less, and that requires oil companies to commit to long-term investment.

If governments impose a windfall tax now, then in business terms they raise the hurdle rate for new investment. Why invest if the profits you are relying on to pay back your investment get taxed away?

Mark Tinker is a director of Execution Stockbrokers. mark.tinker@executionlimited.com