Chancellor Rachel Reeves has been accused of "economic illiteracy on steroids" by blocking £17.5billion of investment in the North Sea after shelving plans to end the Energy Profits Levy.
Industry leaders had met with Reeves last month after identifying North Sea projects to deliver more than a billion barrels of oil and gas by the end of the decade.
They had promised the chancellor that they would press ahead with the projects if the government agreed to bring forward the planned scrapping of the windfall tax in 2030.
While Reeves was initially receptive to the plans, which would provide a shot in the arm for economic growth in the UK, The Times reports she has now backed away from the deal as a result of the conflict in Iran and closure of the Strait of Hormuz which sent oil prices soaring.
A government source told The Times oil and gas companies were likely to make “significant” profits because of the conflict at a time when the public finances are under mounting pressure, adding: “Iran totally changed the dynamics."
But Times sources in the energy industry have branded the delaying of the switch from the EPL to OGPM as "economic illiteracy on steroids”.
They indicated that without tax change, the promised £17.5billion of projects - which would have led to substantial tax receipts and secured thousands of jobs - would be unviable.
A source told The Times: “Oil and gas companies have had their North Sea profits all but wiped out by a punitive energy profits levy that has made the UK virtually uninvestable.
“That remains the case under the current price of oil and gas and the government is wrong to conflate much larger global profits with meagre returns in the North Sea.
“It would be economic illiteracy on steroids if the government were to choose not to seize a £17billion investment opportunity by 2030, which is predicated on an early move from EPL to OGPM.
“Every £1 invested by the oil and gas sector generates around twice that amount in GVA [gross value added] - so the government would effectively be turning down over £30billion in additional value to the UK economy.”
Another industry source, speaking after the initial meeting with Reeves on March 4, told The Times they had been left "very encouraged" about the "the government’s clear desire to move away from the EPL towards a more workable, permanent windfall tax" in the OGPM.
They added: “Ultimately, industry wants to be a constructive partner to a government which is wrestling with the major challenges of a global energy crisis and the impact this will have upon the economy, household bills, the cost of living, fuel supplies and so forth.
"We can make a massive, positive contribution if the tax and regulatory barriers are removed. We believe the Chancellor is on our side in pushing hard for this within government – and we remain hopeful that she’s winning the argument.”
The development comes as the price of oil plummeted overnight as the US and Iran agreed to a ceasefire in the Middle East and the reopening of the Strait of Hormuz.
The BBC reports the price of benchmark Brent crude fell by about 13% to $94.80 (£70.73) a barrel, while US-traded oil was more than 15% lower at $95.75.
But oil prices remain higher than before the conflict began at the end of February when it was trading at around $70 a barrel.
The deal, brokered by Pakistan, was struck at the 11th hour before US President Donald Trump's midnight deadline, after which he had warned "a whole civilisation will die".
But in a social media post last night, Trump said: "I agree to suspend the bombing and attack of Iran for a period of two weeks... subject to the Islamic Republic of Iran agreeing to the COMPLETE, IMMEDIATE, and SAFE OPENING of the Strait of Hormuz."
Iranian Foreign Minister Abbas Araghchi said Tehran would agree to a ceasefire "if attacks against Iran are halted", adding that safe passage through the Strait of Hormuz "will be possible".
Meanwhile, The Times reports the conflict has driven a sell-off in UK equity funds, with a sharp rise in retail investors selling their holdings in March.
Data from Calastone, a funds network that tracks day-by-day fund purchases and redemptions, revealed net outflows rose to £1.44billion in March, up from £927million in February.
The rise made March the worst month for equity funds since November, when pre-budget uncertainty caused investors to sell, and the seventh worst month on record.