Israel’s decision to attack Iran’s nuclear facilities has dealt Rachel Reeves a double blow.
Rachel Reeves will find it harder to hike fuel duty if petrol prices are already high (Image: Getty)
Oil markets are in chaos and the timing could hardly be worse for the UK economy, and our beleaguered Chancellor.
Brent crude was falling towards $60 a barrel at the start of this month, as global demand weakened and OPEC+ kept the taps flowing.
This morning, prices exploded.
Brent crude jumped to just under $73 a barrel after Israel launched strikes on Iranian military leaders, uranium enrichment sites and missile factories.
In retaliation, Iran has unleashed more than 100 drones and markets are bracing for escalation.
“Oil could spike toward $80 if Middle East tensions escalate and supply risks materialise,” said Charu Chanana, chief investment strategist at Saxo Markets.
Mukesh Sahdev, commodity expert at Rystad Energy, said any threat to the Strait of Hormuz, a choke point for oil tankers, could have “serious implications for global oil supply and inflation”.
A rising oil price is bad news for motorists, and Rachel Reeves.
The economy shrank by 0.3% in May. With households already under pressure, an oil price shock is the last thing she needs.
And not just because of the inflation risk.
Experts have been predicting that Reeves will take advantage of falling petrol prices to hike fuel duty in her Budget this autumn.
There couldn’t be a better time to hit motorists, with petrol and diesel relatively cheap.
That opportunity has now been blown to pieces.
Fuel duty has been frozen since 2011 and temporarily cut by 5p a litre in 2022, a measure Reeves surprisingly extended in last year’s Budget.
Robert Salter, director at Blick Rothenberg, suggested she could scrap the temporary 5p cut and add another 5p to the price for good measure, bringing in around £4billion a year.
With pump prices falling from around £1.50 a litre in April last year to below £1.30 at some supermarkets in recent days, many felt the moment was ripe.
Not anymore.
Reeves is under intense pressure to find cash to fund her £600billion of commitments in Wednesday’s Spending Review.
And as the world inches towards full-blown war, she will have to spend more on defence, with the UK falling well short of NATO commitments.
Now her figures are in a mess again.
Fuel duty is a quiet money-spinner for the Treasury, raising around £25billion a year, that’s a staggering £850 per household. It’s set at 52.95p a litre, regardless of the oil price.
Incredibly, VAT is then charged on both the fuel AND the duty, so drivers pay tax on tax.
It’s one of the most regressive taxes we have. No wonder Reeves would like to hike it.
But with oil prices spiking, she may have missed her chance.
Reeves is now stuck. A fuel duty hike on top of rising oil prices could clobber drivers just as living costs start climbing again. It risks slowing consumer spending and applying the economy brakes.
If tensions in the Middle East escalate further, she may be forced to pour more money into defence than currently planned.
Motorists will be watching prices anxiously over the coming days. But nobody will be watching more closely than Rachel Reeves.
