A few weeks ago, while driving through London, I encountered a convey of angry truck drivers. The truckers had enough of fuel prices and targeted their fury towards the ever-increasing duties on diesel and petrol.
I had mixed feelings about their protest. The rage is understandable. The world price had risen to crippling levels, but rather than helping out, the government was still ripping out about 70 percent of the fuel price as duty and VAT.
Fuel tax do more than alienate truckers. There are times when traffic becomes so heavy that London approximates a car park. Without heavy fuel duties, traffic levels would be worse. Under normal circumstances, I am quite comfortable with high levels of fuel taxation.
Nevertheless, the protest provoked my curiosity. Therefore, I thought it would be interesting to look more closely at fuel taxation, if only to become better informed. The data had a few surprises.
The key thing about fuel demand is that it is extremely unresponsive it is to price changes.
Since 1998, total fuel consumption fell about 2 percent. At the same time, the price of oil has increased from about $11 dollars a barrel to $135. It is not hard to see why the government likes to tax it; drivers will be fuel whatever the price. Of course, I can see here the contradiction between using fuel as a traffic-reducing mechanism.
Although the government could really squeeze drivers, it appears that it has shown some restraint. Since 1998, total fuel duty receipts are up ₤3.5 billion or about 17 percent; an unremarkable increase over such a long period.
Before 1999, fuel duties were increasing at a much more rapid rate. Since oil prices began to rise, the government has held back and tried to keep a lid on fuel duty growth. More recently, the government tried to keep diesel fuel duties down at the expense of petrol duties.
The government has probably done as much as it could to keep fuel costs under control, short of cutting public expenditure. The simple fact is that the government depends heavily on fuel duties and VAT to finance hospitals, schools and civil service pensions. The tax has to come from somewhere, and drivers have built up an unenviable reputation to pay now matter how high taxes might be.