Kevin Rudd's election promise to keep petrol prices low has been exposed as non-core. That was confirmed when Climate Change and Water Minister Penny Wong announced that the cost of carbon credits from the forthcoming emissions trading scheme would apply to petrol. The cost is likely to be equivalent to doubling the GST at the bowser.
The cost of signing the Kyoto Protocol and establishing an emissions trading scheme was always going to flow on to the price at the bowser. The cost of the next international agreement, to be completed in Copenhagen in 2009, is unknown but will probably only amplify the pain. And the tax increases on petrol will flow throughout the rest of the economy as higher transport costs increase grocery prices.
Now that he's in government, Rudd cannot deliver on his empty promises and is drawing voter ire. The absurdity is that Rudd seems genuinely surprised by the Opposition and the public's anger over rising petrol prices when he promised to keep them low.
Rudd can hardly feign ignorance. In Opposition he played the same kitchen-table politics that is being used against him to tap into voter resentment over the rising cost of living. Further, in 2001, Treasurer Wayne Swan led the Opposition's attack that ensured the Howard government capped petrol excise.
Soon after coming to government, Rudd attempted to deflect attention from his non-core promise by establishing a petrol commissioner at the Australian Competition and Consumer Commission to watch over petrol prices. Following a naming-and-shaming of Coles Express for increasing prices, the commissioner, Pat Walker, claimed he was helping to stop price rises.
Walker's claim is akin to suggesting he can stare down prices. In fact, Coles Express was merely the first petrol retailer to increase prices that day. Its competitors followed with similar price rises later that day. The irony is that if all the companies had increased their prices at once, the ACCC would have complained about collusion. Petrol retailers simply cannot win.
The Government is claiming that a petrol commissioner will help reduce prices by having an observant watchdog that will increase transparency. But petrol is already a highly transparent consumer product. Standard unleaded petrol is an interchangeable product that can be bought from any service station. As a result, consumers are able to buy petrol from any retailer they like.
Further, petrol prices are advertised on large boards along the road. If consumers don't like the price they see they can simply drive to the next service station. But there is one significant exception in the pricing transparency: government taxes. Oil companies make only a few cents' profit from each litre of petrol sold. By comparison, state and federal taxes are more than 41 per cent of the final sale price.
In his budget reply speech, Brendan Nelson proposed a reduction in fuel excise to reduce the burden on working families. Nelson's proposal is reasonable and economically responsible. The federal Government imposes the GST on petrol after including excise. Because the GST is percentage-driven, the Government take increases as the price goes up. Therefore, any loss of government revenue from reduced excise will be reclaimed through the increased GST take.
Rudd's response has been to review the application of the GST component on retail petrol before the excise. Doing so will reduce state revenue from petrol without harming the federal take.
Now Rudd is considering options to stop intra-day price changes at the bowser. The consequences are predictable. By removing the opportunity to reduce or raise prices, petrol retailers are left with limited options and are likelier to raise the price than reduce it for fear of lost profits.
A similar regime already operates in Western Australia. Some petrol stations have been fined for reducing, not increasing, the price of petrol.
What is clear is that Rudd was deliberately deceptive or hadn't done his homework. World petrol prices are largely set by supply and demand. Demand is up and therefore so are prices. China's consumption has increased by more than 50 per cent in seven years and is meeting this demand almost entirely from new imports.
The vast majority of Australian petrol is sourced locally but is priced at the market rate of our region's local trading hub, Singapore. The reason is simple. Why should Australian producers sell oil cheaper than the world price when it can be exported to the highest bidder?
Rudd should not be surprised that voters are angry about his failure to keep petrol prices low. The only way he can redeem himself is to reduce the Government's profit margin on petrol, the excise. Instead, Rudd and Wong are proposing to increase the Government's tax take through all of the costs that come with reducing carbon dioxide emissions, and with it placing further pressure on working families.
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