Dilemma of taxing fuel in spotlight after French ‘yellow vests’ protests
Crude oil prices are falling, but attention on fuel prices is rising. A barrage of tweets from US President Donald Trump blame oil producers for “too high” prices. And the French “yellow vests” have set Paris ablaze over fuel price increases.
This illustrates an old challenge for Opec. But it is also encouraging for the organisation’s future policy.
Regular petrol in the UAE sells for the equivalent of $93 (Dh341.61) per barrel, which includes $60 per barrel for crude oil plus the cost of refining and distribution. The US’s modest fuel taxes, which have not increased since 1993, lead to an average price of around $105 per barrel.
In comparison, French anger is understandable when motorists pay $258 per barrel, the difference being tax. President Emmanuel Macron’s government had planned to add another $0.12 per litre to petrol and $0.24 per litre to diesel.
Europe lagged behind the United States in motorisation, making high fuel taxes politically possible immediately after the Second World War. The expansion of mass car ownership thereafter made further sharp rises difficult, and so the pattern has been set ever since of high taxes in Europe, low ones in the US.
The smaller scale of European countries, better public transport and the discouragement of high fuel prices, cause the average German or Italian to drive only about half the distance per year than an American. European cars are also generally smaller and more fuel-efficient.
So paradoxically, Americans spend almost twice as much of their income on fuel than Europeans.
Fuel taxes have been justified in many ways: to fund road-building and maintenance (the main rationale in the US), to limit congestion, to compensate for pollution and to cut national vulnerability to oil supply shocks. The security threat argument was reinforced by the 1956 Suez Crisis, which blocked the most direct route from the Middle East to Europe, leading to fuel rationing in Britain. More recently, fuel taxes have environmental support: to reduce carbon dioxide emissions responsible for global warming and encourage a switch to electric vehicles.
But one of the most attractive features of fuel taxes is to raise revenue. Driving is unavoidable for most people, nearly all vehicles are petrolor diesel-powered, and the price at the pump deflects anger from the government to the oil companies – usually, but not always.
As an example, the UK, whose oil consumption is about 1.6 million barrels per day, raises £28.2 billion (Dh130.4bn) annually, 3.6 per cent of government revenue, in fuel duties, and VAT on fuel adds about another 0.7 per cent. Opec member Angola produces about the same quantity of oil, but earns less in sales, about $34bn.
Despite the revenue and environmental imperatives, and contrary to the Parisian rioters, European fuel taxes have actually fallen over the past two years as a share of the final price, and in real terms they are no higher than 20 years ago. Then, in 2000, the UK almost closed down when angry lorry drivers blockaded fuel depots, protesting against prices that had risen during the 1990s from among the cheapest in Europe to the costliest.
People respond more to “changes” in fuel prices than to the absolute level. Opec has long been concerned about the dilemma this poses. If it increases production to lower crude oil prices and boost demand, it fears governments will simply raise fuel taxes, keep the end-user price about the same, and the oil exporting countries will lose revenue for no gain in sales volumes.
Of course, the argument that oil-consuming countries’ governments are taking an “unfair” share of the value of fuel is misleading. If countries did not tax fuel, they would have to tax something else to provide services to their citizens.
For oil-producing nations, though, the sale price of oil, after production costs, represents a pure gain.
And the recent protests suggest a ceiling on motorists’ willingness to accept tax rises. That should be good news for Opec: it limits heavy fuel duties. If battery vehicles take over, governments will have to make up lost petrol duties by taxing electric cars, or something else.
Future climate policies on transport will be designed differently. Either carbon taxes have to be clearly offset – by cutting personal income tax, VAT or other levies, or by returning revenues to consumers as a “carbon dividend”.
Mr Macron’s plan signally failed to seem fair to many French people, struggling with high living costs. Or, clumsy administrative measures, such as setting fuel efficiency levels so tight that most conventional vehicles cannot meet them.
But European fuel taxes are becoming a sideshow. The continent’s consumption is dropping, and future demand growth is in countries such as China and India, which have today moderate taxation. Demand is shifting to international aeroplanes, ships and petrochemical plants, which usually pay no fuel tax.
When pump prices are less of a political hot potato, Opec will have to focus simply on maintaining its crude as a competitive source of energy.
In the US, modest taxes lead to an average price of $105 a barrel. In France, motorists pay the equivalent of $258