Abu Dhabi, UAESunday 21 July 2019

The dilemma of taxing fuel gains spotlight with French protests

Although crude prices are falling, fuel prices are rising due to taxes

French anger is understandable when motorists pay $258 per barrel, the difference being tax. AFP
French anger is understandable when motorists pay $258 per barrel, the difference being tax. AFP

Crude oil prices are falling, but attention on fuel prices is rising. A barrage of presidential tweets 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 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 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, equivalent to $19 and $38 per barrel, respectively.

Europe lagged behind the US 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, Italian or Swede to drive only about half the distance per year of an American. European cars are generally smaller and more fuel-efficient.

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So paradoxically, Americans spend almost twice as much of their income on fuel than Europeans. Because of low taxation, rises in crude oil prices have a much greater proportionate impact on prices at the pump in the US than in Europe, making them politically more sensitive.

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 of course, one of the most attractive features of fuel taxes is to raise revenue. Driving is unavoidable for most people, nearly all vehicles are petrol- or 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 twenty 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.

So 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 countries, though, the sales 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 as a form of carbon tax, a way of cutting greenhouse gas emissions and spurring a transition from internal combustion engines to electric cars. If battery vehicles take over, governments will have to make up lost petrol duties from 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, even banning internal combustion engines outright, will be used.

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 – higher than the US’s, but well below Bulgaria’s, the lowest EU rate. 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.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: December 16, 2018 05:33 PM

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