Parliamentarians & Cheap Petrol

It might appear from his words that this claim originates from the "Fair Fuel UK" campaign. So I checked out their web site and did a fact check. We found that the Fair Fuel UK (to their credit) actually make no such explicit claim about tax cuts increasing tax revenue. It is only implied that such cuts will increase economic activity and thereby are a good thing - leading to recovery and, eventually, increased tax revenue. The only real justification for their campaign appears to come from the idea that we pay a bit more than our European partners.

However, after scrutinising the Fair Fuel UK web site I found NO citations to any evidence supporting their case. The entire case is built upon anecdotes and opinion polls. If we are to have tax cuts why target fuel? Would those cuts have a better effect if targeted on something like childcare?

Let's examine the link between fuel and tax then: the demand for transport petroleum products (petrol, diesel, auto-gas) is what economists call "in-elastic". The actual demand does not respond well to price changes. This is because there is no immediate substitute. Unlike in "Back to the Future" you cannot put a banana peal in your tank and keep on trucking. Demand is highly "elastic" for products that have close substitutes, such as brands of Tea. Unless you have a strong brand loyalty you may choose your tea bags based only on price. Hence if PG Tips is 5p more expensive this week than Tetley, then you buy Tetley and the bottom drops out of the market for PG Tips. Boing! Very elastic.

In order for a tax cut on fuel duty to increase tax revenue then demand for petrol would have to be highly elastic. A simple example: if the tax on petrol were halved then you would have to buy twice as much in order for tax receipts to remain stable. You would have to buy a bit more in order for the Chancellor of the Exchequer to smile.

You aren't going to do that are you? The idea is absurd. We are addicted to oil. It runs our economy. It doesn't matter if it doubles in price or halves in price: we'll drive approximately the same number of miles BECAUSE WE HAVE TO. The school run, the daily commute, the trip to the shops. All essential. Who REALLY drives for fun?

Even through the Thatcher years for "Roads for Growth" the Treasury added to the Fuel Price "Escalator" year after year. And do you know what? The relative cost of motoring actually went DOWN year on year. As we became more prosperous the proportion of our income spent on cars fell and fell and fell. Now most driveways are crowded with two or three cars (or more). Our highways and byways are crammed with trucks from every nation in Europe. This is the result of abundant cheap oil & government policies to encourage its use. We have never had it so good.

We only feel the pinch now because of rapid price instability and exchange rate changes. The price of fossil fuels has gone crazy and the only way is up, up, UP! We are sensitive to short term RELATIVE changes in petrol price, not the absolute price. Compare our prices to those in the USA. They pay a tiny fraction of what we do yet even small increases are enough to bring down Presidents. At the end of the day persistent high fuel cost is actually a good thing. Compare the competitiveness of the UK, US, Japanese and Chinese motor industries. Everywhere outside of the USA high fuel prices and Regulations have made our cars smaller and more efficient. As the 2009 Peak Oil Report from the Department of Energy and Climate Change points out: Britain is in a far better place than its competitors when the really serious prices rises start kicking in. We have gone a long way to inoculating ourselves from the inevitable prices increases that come from an addiction to a finite resource that is slowly being depleted.

ADDICTION. That's the word isn't it. The Treasury tax transport fuels in order to curb addiction and over-reliance. This is why we tax cigarettes and alcohol. These are not goods - they are "illths". They do not create long term value. They destroy lives in the way that traffic pollution has lead to an epidemic of asthma in the young. Nothing good will eventually come from encouraging consumption of oil. The sooner we are off this drug the better.

If we use economic advantage as a basis for all our decisions then we would legalise drugs, prostitution and all forms of pornography. We don't because we recognise the externalities - the hidden costs. Hence, eventually, the price of petrol is a moral issue. Please write your local paper and ask this: is it even ethical for your local MP to encourage you to consume more petrol? We don't think so. There is a better way.

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