$4/gallon Gas & other stories

Last weekend the USA went crazy as petrol there peaked at a new high of $4.61/gallon. Here is the maths: a US Gallon is 3.785 Litres and the US Dollar is about £1.60. So by our reckoning $4.61/gall is £0.76/litre (approximately half the cost of UK petrol, the UK petrol equivalent there would be $8.41/gallon.) It lead to James Hamilton, Professor of Economics at the University of California (well known for work on the relationship between oil prices and economic growth) to ask: “will this scuttle economic growth? He concluded: “no”. Why? Regardless of the media storm they have been there before – in 2008. The US consumer is no longer shocked. Life will go on, and if it didn’t we would seriously have to ask why. Their petrol is really, really cheap. But is that a good thing? Are they prepared for what is to come?

It isn’t the absolute price of fossil fuels that we don’t like. It is the change in prices we hate. In time you can get used to anything. The economy absorbs each price shock and life goes on until a cheaper alternative arrives. On this side of the Atlantic the debate seems quite different. I was reminded of this when a well wisher from another civic society group copied me in on an email that had been circulating. It had originated from Fair Fuel UK and been circulated to (amongst others) our local MP and editor of the local newspaper. Fair Fuel UK are a pressure group trying to stop fuel duty rises. The email claimed that you pay £50 in tax every time you fill up. (If you read their small print the numbers were less impressive: you needed to consume a whopping 60litres of petrol and then add Fuel Duty to VAT to get only £48.76.)

Fuel Duty in the UK has never been a carbon tax. Indeed, for a very long time, it has not even been about raising money to build and maintain highway infrastructure. It is just there to raise money. The reason why fuel is a lucrative taxable item is because demand for it (as we covered in a previous blog) is relatively inelastic. It is the same for cigarettes and alcohol. We’ll pay ANYTHING for them. Fags and booze are bad for you and most people feel less resentful when they know how much ill-health costs the NHS. After all, you can give them up if you need to. But what about petrol? We are all addicted to it and it is much harder to give up because practically our entire transport fleet runs on it. That means our economy runs on it. So we feel resentful because petrol is “good”.

Let’s go back to this £50 of tax headline and compare this to a real world example. I drove to Bradford and back on Business last week. That was a total of 416 miles. I filled up my tank twice, once there, once back. The total cost was £28.66. Total fuel usage was 38 litres. Why? Because I was using LPG (liquid petroleum gas) and my car has a tiny 3 cylinder 1.0 litre engine. This isn’t a story about being smug. It is a story about reality economics. If you don’t like the heat, get out of the kitchen. If you don’t want to spend big bucks at the petrol pump then adapt to this new reality. The problem won’t go away even if you think petrol is an unmitigated “good”. (It is not.)

You want to know what the Government think? Well, in 2010 the Department of Energy and Climate Change commissioned a study that resulted in a report called “Risks and Impacts of a Potential Future Decline in Oil Production” (you can download it and read it from our Transition Town High Wycombe web site). One of the conclusions was that the UK was better prepared for fuel price shocks simply because petrol was already very, very expensive. It is considered an energy and economic security issue.

So our MP, newspapers and folks at Fair Fuel UK can get as worked up as they like about Fuel Duty. It won’t make any difference in the long run. Fuel will always escalate in price ahead of inflation and we will absorb the costs for a long time to come. It is why we need alternatives. We need to start paying for those alternatives sooner rather than later. If the money didn’t come from fuel it would be taken from someplace else. It is our lot in life to be taxed.

I was in a meeting with some Councillors the other day when one told us how it was important to reduce the cost of heating our homes. Why? To stay ahead of the “green taxes” he said. Most arguments about “green taxes” seem to be about how much they are. Our argument would be this: there is no such thing as a “green tax”.

The term “green tax” is an empty slur. A convenient fiction to fill column inches by engineering mock outrage. Let us break it down: firstly the word “tax” by which we seem to have come to expect that it is just “money stolen from us and burnt by somebody”. Yeah, right. Err, no. Obviously tax income is spent somewhere in the economy. We all have our favourite spends. We quite like the NHS and Schools. Somebody else would like to see their tax money spent on street lights and Trident Nuclear deterrent. To each his own. Our hatred of tax is in proportion to what we think the money will be wasted on. Which leads us to the “green” bit.

This is obviously money taken from us to be spent on “green”. “Green” is tree-hugging hippy communes populated by tofu-eating, sandal-wearing, beardy-wierdos who spend all day gently nurturing sick endangered butterflies back to full health. Our “green taxes” will probably be spent on hemp and its derivatives. Clearly this is a waste of money. Of course that is NOT what this taxation is spent on. In terms of our household energy bills a “green tax” will be spent on renewable, clean, sustainable energy. Energy that is not pumped by Gazprom from somewhere behind the Urals, ie, Siberia. It is energy that won’t swing wildly in price. Indeed, its price can be kept down because nobody owns the wind or sun.

So, our “green taxes” are actually “energy security investments” that we have to make NOW in order to bring down the future cost of heating our homes. Of course if you still adamantly believe that markets are always perfect and governments always bad then you will hate the idea on principle. In our view we have a choice now as to whether we adopt what Economist John Cassidy calls “reality economics” versus “Utopian economics”. To accept “green taxes” we have to embrace the reality of the world around us. The free market in energy we adopted in the 1980′s lead to sub-standard infrastructure and an over-reliance upon gas. We did that because investors wanted quick returns. They were not interested in what was going to happen twenty years later. The market failed to deliver long-term security. Hence we have a corrective tax to level the playing field. It is levelled between the people of today and the people of 2025 & beyond.

Fossil fuels are not evil, but their time has come and gone. The market is not well suited to make this adjustment by itself. Hence it is rational to penalise fossil fuels out of existence (rather than our perverse & old fashioned approach of subsidising them) and spend the money raised on what comes next. We all have to learn to stop worrying and love the carbon tax. That tax is our future. Either that or we all move to America. But they have far more pain in the pipeline than we have. Count yourself lucky.