UK public finances and oil prices: tax bonanza from black gold?

The UK's self-sufficiency in fossil fuels shields public finances from the negative effects of higher oil prices on general economic activity. Changes in the international price of oil affect government revenues from the corporate and household sectors. Taxes on oil production are estimated to increase by around 0.1% of GDP for every $10 increase in the oil price. The increase in tax revenue on profits from oil production is partly mitigated by the fall in profits of the oil-consuming industries.

Nevertheless, even if the non-oil corporate sector were to absorb the entire increase in production costs through a reduction in profit margins, the net impact on corporate taxation would remain non-negligible, at 0.05% of GDP. On the demand side, we estimate a weaker effect of changes in oil prices on taxation revenues in the UK, as the reduction in fuel duty revenues following an increase in the crude oil price would offset higher revenues from VAT. The estimates on the budgetary impact of changes in oil prices underline the role of taxation regimes on oil production and energy demand, as well as the effect of changes in oil prices on the distribution of profits across industrial sectors and on the composition of household spending.