Governments should stop trying to make gasoline cheaper
The oil market is screaming at consumers to rein in their use of fuel. Governments are doing everything they can to have us to buy, buy, buy. But there can only be one winner in this battle, and it won’t be our elected representatives — or us.
In March, just after the U.K. government announced a yearlong cut in fuel duty, pundit Javier Blas argued that governments were pursuing the wrong energy policies in encouraging, rather than curbing, fuel demand. He was absolutely right. Evidence of policymakers’ errors is mounting, yet they are doing nothing to correct their mistakes. If anything, they’re only making matters worse.
Pump prices for gasoline and diesel are hitting new highs. In the U.S., gasoline topped $4 a gallon in all 50 states last week for the first time ever, and the peak driving season hasn’t even kicked off yet. National average prices for both gasoline and diesel fuel are above previous highs set during the oil price spike of 2008.
In the U.K., cut in fuel taxes was short-lived, with prices now back above pre- cut levels.
The problem is fuel stockpiles are at multiyear lows. Inventories of middle distillates — which include diesel, heating oil and jet fuel — across the developed economies of the OECD nations were at their lowest in more than 12 years at the end of March. Look at the difference between prompt and future prices for fuels. The backwardation in road-fuel markets (where prompt prices exceed those for future delivery, indicating immediate supply shortages) is bigger than it was during 2008, when crude prices hit $150 a barrel. Rather than recognize that fuel demand needs to come down, governments around the world are doing all they can to prop it up — slashing taxes, maintaining subsidies or berating retailers for allegedly failing to pass on tax cuts in full.
While popular, reducing fuel prices is only going to make the situation worse, as demand for transport fuels picks up during the northern hemisphere summer. Cutting taxes at fuel pumps provides some small and very temporary relief for drivers. But by making fuel more affordable, demand is stimulated relative to what it would otherwise have been.
Painful and unpopular though it is, governments need to let the market work. Those who need help should be targeted specifically, whether they be haulers or the less well- off.
Fuel prices will keep rising unless demand is destroyed to meet available supply. Reducing pump prices through tax cuts is simply prolonging the pain.