The Federal Government is in serious trouble; blaming foreigners for domestic ills is the last refuge in politics. The Government is blaming our neighbours' subsidised petrol prices for high prices in Australia. We are invited to believe that Australian working families struggle to pay to fill the tank because Chinese and Indonesian working families are getting a handout.
The trouble for the Government began when Kevin Rudd promised to maintain downward pressure on petrol prices. The promise of a petrol price commissioner was made at the ALP campaign launch -- the average petrol price that day was $1.291 a litre in Melbourne. That policy has failed. Plan B was FuelWatch. The best the Australian Competition and Consumer Commission can say is that FuelWatch won't harm consumers.
By trying to remove foreign fuel subsidies, the Australian Government can claim to be promoting economic efficiency abroad and attempting to reduce petrol prices at home.
There are, however, three issues to consider. First is the impact of fuel subsidies on world oil and petrol prices. The Organisation of the Petroleum Exporting Countries forecasts that Chinese demand for oil will be 7.98 million barrels a day this year -- 9.2% of world demand. In contrast, North America makes up 29.6% of world demand. The demand price elasticity for oil and petrol is very low. If we assume that China has a 20% subsidy for petrol, that implies excess petrol consumption of about 2%.
If China were to remove that subsidy, its oil demand might reduce by about 160,000 barrels a day (0.18% of daily world demand). Assuming no changes in world supply, and an oil price of $US130 a barrel, that implies prices would fall by $US2.34 or about $0.02 to $0.03 a litre at the pump. This sort of calculation shows that fuel subsidies in developing economies are unlikely to have a huge impact on world oil prices or Australian petrol prices.
Second, if subsidy drives prices down, taxation must drive prices up. If the Australian Government wanted to reduce petrol prices and the apparent strain on working families, they could always lower the excise. The electorate knows this, and 52% of voters want petrol taxes cut. Many arguments can be made against cutting petrol excise, but none stand up to scrutiny. It is argued, for example, that petrol taxes are good for the environment. Maybe. But an excise tax of $0.381 a litre is equal to a carbon price of $160 a tonne of carbon dioxide.
Finally, we should consider the wisdom of preaching to others about the inefficiency of subsidies. After all, the Government paid $35 million to Toyota just last week and the bulk of the federal budget consists of subsidies and redistributions.
All up, The Government has a petrol price problem on its hands. Blaming OPEC and our neighbours for our high prices is not good policy. Lowering taxes is the only way petrol prices can be reduced in the short run and the only way the Government can assist "working families".
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