The black stuff is back with a vengeance. Brent crude plunged below $70 a barrel this morning, breaching a threshold not seen since before the Iranian missile strikes sent markets into a tailspin last November. The trigger? A leaked Treasury memo suggesting the Chancellor is seriously considering a temporary reduction in fuel duty to ease the cost of living squeeze.
Let's be clear: this is not kindness. This is arithmetic. Rishi Sunak's fiscal headroom is evaporating faster than a puddle on a hot pavement, and the political imperative to throw voters a bone ahead of the next election is reaching fever pitch. The memo, obtained by this paper, outlines a scenario where a 5p per litre cut would cost the Exchequer roughly £2 billion over six months. In the grand scheme of government borrowing, that's loose change. But in the context of a deficit that has swollen to 7% of GDP, it's an admission that the Treasury is terrified of the alternative: a full-blown consumer recession.
The oil market's reaction has been textbook. Speculators who piled into long positions after Tehran's retaliation are now scrambling for the exits. The fear premium that had been priced into crude since the Hormuz Strait skirmishes has been fully unwound. Saudi Arabia, the only producer with enough spare capacity to matter, has signalled it will not cut output to prop up prices. This is not an oil shock; it's an oil glut. The cartel is now at war with American shale, and the consumer is the unlikely victor.
But low prices are a double-edged sword. For every pound saved at the pump, there is a pound of revenue lost from North Sea producers. The Treasury's own figures show that a sustained $10 drop in oil prices knocks £800 million off corporation tax receipts. And let's not forget the green agenda. The Chancellor's net zero enthusiasts will be furious that low petrol prices undermine the case for electric vehicle subsidies. The carbon tax, remember, was supposed to make fossil fuels unpalatable. Now the market has done the opposite.
Meanwhile, sterling is quietly strengthening on the news. A lower oil import bill is good for the UK's terms of trade, and currency traders are pricing in a reduced risk of a stagflation scenario. But the bond market is not celebrating. Gilt yields are creeping higher in anticipation of more government borrowing to fund the fuel duty cut. The 10-year yield has risen 15 basis points since the leak. The fiscal arithmetic does not add up without either spending cuts elsewhere or higher taxes down the line. The Chancellor is borrowing from Peter to pay Paul.
So what comes next? If oil prices stay low, the argument for a duty cut evaporates. But if they rebound, the Treasury will look foolish for having acted too late. The smart money is on a short-term fix: a three-month holiday from fuel duty increases, trailed as a 'cost of living support measure'. The Opposition will howl that it's a giveaway to oil companies. The environmentalists will scream betrayal. The markets will shrug. And the Chancellor will hope that by the time the election comes, voters will remember the cheaper petrol, not the soaring national debt.
In the City, we call this 'kicking the can down the road'. It works until you hit a pothole.
