UK treasury faces £ 3 bn revenue loss over oil price collapse

Nov 19, 2001 01:00 AM

The collapse in the price of oil could cost the British government up to £ 3 bn in lost tax revenues, Treasury forecasters have estimated. The figures are based on an internal pricing model, which reveals that a $ 1 movement in oil prices hits government finances by about £ 300 mm. The model suggests that the government will face a £ 3 bn hole if the oil price, which has fallen by around $ 10 a barrel since September, remains at current levels for the rest of the year.

Oil prices, weakened by the risk of world recession, fell heavily as OPEC was forced to scrap a tentative agreement to cut production by 1 mm bpd. The producers dropped the planned cut after a bungled attempt to corral Russia into a larger deal to reduce output.
Kuwait said that the showdown between OPEC and Russia could lead to a price war and a collapse in the cost of oil to just $ 10 per barrel. At that level, much of North Sea oil production is unprofitable, and without profit the Treasury has nothing to tax.

The threatened revenue loss comes as slowing growth fuels pressure on the Chancellor over tax and spending ahead of the Pre-Budget Report. Weekend forecasts by the International Monetary Fund projected that the economy will grow by just 1.8 % in 2002, down from the 2.4 % previously estimated. The IMF also said that it believes the US is in a "mild recession".

Source: Times Newspapers Ltd.
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