Dominic Lawson: Mr Brown can try to blame this crisis on Opec, but the real fault lies with his own tax policy

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The Independent Online

The British Government has two policies on oil prices. The first is that the price we pay for oil is too high, and must be brought down. The second is that the price we pay for oil is too low, and must be increased.

The second policy rests its case on the Stern Review's assertion that the price consumers are charged for fossil fuels is "the biggest market failure in history" – because it doesn't take account of the "climate costs" they allegedly impose on future generations.

Gordon Brown gave the now-celebrated economist Nicholas Stern a personal standing ovation when he delivered his report on the economics of climate change; the fuel price escalator – abandoned at the time of the road hauliers' protests and blockades in 2000 – is set to resume. Even without that, taxes on petrol and diesel are dramatically higher in the UK than in any other European country – we lead the world in fuel duties. So you might think that Gordon Brown would be delighted that crude oil prices have soared recently – isn't the market doing what Lord Stern of Brentford and the Government ordered as environmentally essential: to make us use less of the stuff? Apparently not.

This week the Prime Minister told the Google Zeitgeist conference: "It is, as people recognise, a scandal that 40 per cent of the [world's] oil is controlled by Opec, that their decisions can restrict the supply of oil to the rest of the world, and that a time when oil is desperately needed, and supply needs to expand, that Opec can withhold supply from the market."

This is not the first time that Mr Brown has attacked Opec in such terms. He did so – not coincidentally – when there was a sharp upward turn in petrol prices in 2005: it was the then Chancellor Brown who told the Confederation of British Industry that it was all Opec's fault for not producing more oil.

This produced a withering retort from the then Opec president, Sheikh Ahmad Fahd al-Sabah. He pointed out that the British Exchequer was taxing fuel at a rate of 75 per cent and asked who would buy the extra millions of barrels a day of oil that Mr Brown was calling for: "If he would like to have it I would be happy to sell it to him."

What Sheikh Ahmad observed then remains true today. There is not a shortage of crude oil – inventories are at normal levels, worldwide. Have you seen any queues at petrol stations? Do you know of any? Are there any queues at gas filling stations in the United States? Nope.

Far from operating as a restrictive cartel – whatever their aspirations – 12 of the 13 members of Opec are pumping out oil at maximum capacity. Saudi Arabia alone has the flexibility to produce more than their current output, but they are already producing well in excess of their official Opec quota.

Last week, in response to a personal plea from President George Bush, the Saudis agreed to increase their output by a further 300,000 barrels of oil a day. The announcement had no effect in halting the upward rush of the market price.

That is because most of the recent surge has been driven by oil "futures": the financial houses which dominate this market are convinced that oil production in the years ahead will not be able to meet demand – and so they believe that they will be able to sell "future" barrels of oil for more than they are now paying for them.

At the moment, however, there is enough oil in the market to meet immediate demand – and the Saudis argue that if there is a supply crunch coming in the years ahead, isn't that when they should be producing more, rather than now?

To the extent that there are already bottlenecks in the system, this is principally due to shortfalls in refining capacity. You can't put crude oil into a motor car – at least not if you want it to move. Yet for other environmental reasons – called "not in my back yard" – over the past 30 years there have been no new refineries built in the US or Europe. Is that another "scandal" that can be blamed on Opec?

On the same day that Mr Brown fulminated against Opec, the US House of Representatives overwhelmingly approved legislation enabling the Justice Department to sue Opec members under anti-trust laws for "limiting oil supplies". President Bush has said that he will veto any such bill. He probably remembers how in 1986 his father – then the Vice-President – pleaded with the Saudis to cut back their production when the oil price had collapsed below $10 a barrel. They did so – thus saving the oil-producing states of Texas, Louisiana and Oklahoma from economic meltdown.

This underlined the paradox at the heart of the West's attitude to Opec: it is rightly suspicious of the operations of a cartel, but at the same time wants the price stability that Opec itself claims as its principal objective.

In this context, the dispute between Gordon Brown and Opec is not about production at all: it is a squabble over who collects the rent. The Prime Minister wants the British consumer to pay a very high price for petrol and diesel, but for the British Government (as tax-collector and distributor of benefits) to be the principal beneficiary rather than the countries which actually produce the black stuff.

This racket worked well when crude oil prices were at historically low levels. It enabled Chancellor Brown – even with the fuel price revolt in 2000 – to siphon off vast revenues in indirect taxes without facing insuperable public dissatisfaction.

The other truth which Gordon Brown evades is that Britain is also a significant oil producer: the soaring price of crude is producing a windfall from taxes on companies operating in the North Sea. If current prices hold, they will generate extra above-Budget Petroleum Revenue taxes this year sufficient on their own to fund the £2.7bn cost of the desperate Crewe by-election hand-out announced last week by Chancellor Darling.

Although this is not the purpose of Gordon Brown's oil taxation policies, if he does want to help to destroy Opec, he is going about it the right way. The more expensive it becomes to buy gasoline, the more people will find ways of not using so much of it. Much of the current hysteria seems based on the idea that demand for oil can not be reduced. Of course it can, and will: last year the supposedly incorrigible US reduced its oil consumption by 5 per cent.

It could just be that the speculators who have driven up the price of crude oil futures to such a giddy height might discover that they have dramatically misread the market: if the sub-prime crisis has taught us anything, it should be that a speculative bubble has the capacity to burst –indeed, that is what bubbles do.

Meanwhile, however much the Prime Minister is worried about the public's rage at high fuel prices, he really shouldn't try to persuade us that it's entirely the fault of grasping Arabs.

The level of fuel duty and VAT is clearly stated on every gas station forecourt in the land – and we all know who is responsible for that.

d.lawson@independent.co.uk

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