Excellent point – and I mostly agree with you.

However, it does rely on how much production from different destinations are in fact substitutes – for example, in the case of crude oil itself the way the gap between West Texan crude oil and Brent oil adjusts has always suggested there is some imperfect substitutability in the near term. Say if there is a relationship between firms that use North Sea Oil, then part of the tax will indeed fall upon them.

As a result, if it is a temporary fuel tax cut (which it really should be, given that the tax should be initially set on externality grounds) there is a good reason to believe that these tax changes will get in each others hair in the short term – nullifying any implied stimulus and the “fall in motoring costs” the chancellor is banging on about.

If this is a permanent tax shift, then the relative price of fuel will be lower – but so will investment in oil facilities and production in the North Sea. In that case we need to ask whether such a tax shift is capturing the trade-off we want between efficiency and equity – which depends on whether the previous fuel tax was set in line with externalities, and whether we think capital is already being taxed at the rate we think captures our perceived equity-efficiency trade-off.

[Just to be clear here, I do agree with you regarding the price – I just have a poor view of the effectiveness of the policy, and find myself cynical with regards to the realpolitik involved. As a result, I have an implicit incentive to come up with the largest set of reasons why the policy would fail 😉 ]