Tuesday, 8 July 2008

Drivers are always ready to pay

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.

21 comments:

Anonymous said...

Facinating, Alice.

Of course, by the same token, in the US drivers refuse to pay - and their rising consumption of bioethanol is ominously pushing up the cost of food.

One has to be especially careful in UK city centres late at night not to drive over horizintal binge drinkers.

How about a Europe-wide hike in duties on all alcoholic beverages? More grain could be diverted for bioethano without affecting useful food-production, binge-drinking would be curbed, and fuel prices stabilised!

Should we not propose this to our local, wine-tippling Euro-MP's?

B. in C.

Anonymous said...

While I'm generally very much in favour of kicking the government out of the economy, drivers are probably the single biggest challenge to free market theory.

Basically, if we remove all the nanny-state restrictions and tax-theft currently suffered by drivers, we'd make things an awful lot worse.

There's something about cars where a huge percentage of otherwise normal people become selfish dangerous short-sighted morons once they get into one.

The UK desperately needs less cars and less road miles. Expensive petrol is the best way to achieve it. Personally I'd like to see all of the externalities of driving put into the price of petrol (e.g. accidents, noise pollution, air pollution, loss of greenland, parental time supervising kids who live near roads etc).

Nick

electro-kevin said...

Nick

And yet we've had consistent policies of population concentrations in our cities to the point that people have been forced to live in satellite towns and that parents have had to move away to remote areas because of the pressures on housing stock.

Big roads and commuter belts were deliberately created by government in order to encourage this independance. The public transport system was badly neglected (most notably by the Tories) and left to the mercies of feral yobs at night.

The Rowntree Foundation discredits itself by stating that a car is considered to be a luxury. For me and for many it is essential so high petrol prices aren't something that we can opt out of.

Believe me when I say that a carless life would be bliss. The average person really does not take on all of the associated liabilities and costs for the fun of it.

All sticks and no carrots.

What you're talking about is punishment, statutory theft and no remedy for problems created by government in sight.

powerman said...

I commute because house price inflation under Labour made it impossible to live in the city in which I work (and be free to stop off for quick beer with work colleagues when I fancied rather than . I would much rather cycle a few miles everyday across the city than drive down 15 miles of congested A-road. Pumping up taxation would simply leave less for me to spend on other goods without discouraging me from driving, up until the extreme point where I was forced to use an extra 2 hours of my potentially productive day getting to and from work with public transport.

The first lesson everybody tends to forget when wishing the government would tax, control or prevent something is 'nothing is free'.

sobers said...

While I agree that higher fuel prices are a "good" thing in that they make people aware of the cost of travel, and will try to avoid wasting fuel on unrequired trips, surely there should be some differential in taxation between business and private usage?

If business transport costs rise at the same rate as private ones, the inflationary effect is massive (as we are, and will increasingly be, finding out).

Surely it would be better if haulage companies could claim some sort of rebate in tax duty. All lorries are registered and have tachographs so some sort of cross checking to prevent fraud would be relatively simple. That way haulage costs could be kept down, thereby reducing the inflationary shock of higher oil, while keeping the incentive on private individuals to reduce fuel usage.

PS I don't run a haulage firm!

powerman said...

"While I agree that higher fuel prices are a "good" thing in that they make people aware of the cost of travel"

No, they are a state imposed distortion of the cost of travel.

The theory that the state needs to stop us from traveling in cars by imposing punitive taxes suggests that ordinary people aren't intelligent enough to decide whether or not public transport or a car is best suited for a particular journey. If this was true, why did Livingstone deliberately need to create congestion to win support for his 'congestion charge'?

Anonymous said...

Powerman,

And there's the rub. Cars are a godawful blight on the country and a classic example of the prisoner's dilemma run wild. It is absolutely a good idea to reduce the number of cars on the roads and the number of miles driven.

The problem is such social engineering requires awful distortions and will result in unintended consequences.

People talking about being priced out of cities need to get a few things straight:
1) Connecting suburbs into communting range raises prices there. They'd be cheaper without communters;
2) You are not priced out. Your expectations are too high;
3) Stretching out life with the motorcar has made society extremely vulnerable to high oil prices. We won't have the collapse of California, but it will suck
4) Pedestrians pay by far the highest price for cars due to the danger, the noise, the gridlock ruining public transport, and the loss of safe roaming for children.

Nick

aSteve said...

I think that the high price of fuel in the UK is a blessing in disguise... as oil has risen in price so dramatically in recent years, British business has been insulated in the sense that their proportional increase in the cost of fuel has been far lower than it might have been.

I also think that you're making an error of judgement in claiming that demand is not very responsive to price... there are long delays built into the system. One can reduce travel by a change of lifestyle; a change of organisation in businesses - and a shift in general culture. These things take effect slowly.

I find it remarkable that, in spite of SUV culture and a significant increase in the number of vehicles... and an extremely buoyant air industry... that our consumption has fallen over the last decade.

I'm pretty optimistic about oil. I anticipate that within the next 30 years, we will start to see mainstream electric vehicles... and it is hard to envision that the level of commuting in modern business cannot be improved upon - not for reasons of scarcity of resources or environmental impact... but for the simple reason that someone who spends a lot of time travelling will be less otherwise productive. I hope that the fad of cheap-flights for holidays will die a death and be replaced by longer more leisurely breaks. All of this, of course, is motivated by a desire for a greater quality of life... not for any idealistic fallacy.

Anonymous said...

I'm all for it (higher petrol prices). I live in a pretty wealthy area but it is truly amazing how quiet the roads are now and how slowly the little traffic flows. Now, I can turn right into the main street with scarcely a glance to right and left. Bliss!

Next, I look forward to the general election and my successful inclusion into the very useful political class. Then, I shall be able to do it for free. Yipee!

David H

Nick Drew said...

asteve - OT, but oil-related: earlier you asked about oil trading multiples, & I hadn't forgotten!

Bear in mind that in Europe most trading is OTC, hence no definitive numbers possible: but here are some 2006 data.

Brent (UK) crude traded 50 billion barrels in 2006” (BarCap, here: I’d say that was a ‘rounded-down rough estimate’, but BarCap is well-placed to have a stab)

The crude-oil underlying Brent (i.e. qualifies as ‘Brent’ for settlement by actual delivery) is some (not all) UK North Sea grades and some (not all) Norwegian. As a rough proxy, take UK production from here: 0.6 bn bbl. So multiple = 50 / 0.6 = 83, probably more.

WTI(US): traded on both Nymex (NY) and in the last couple of years also ICE (London): couldn’t find data for Nymex + ICE + OTC, but Nymex was the biggest of these in 2006, volume 70 bn bbl from here. Again, not all US crude qualifies as underlying for WTI settlement, so conservatively assume half of US production (same source as for UK): 50% * 2.7 bn bbl: So multiple using only Nymex volume = 70/1.35 = 53; must be much more when you stew in ICE + OTC volumes.

These were 2006 data: obviously spec trading has increased greatly since then, but oil production has not (!!) In short, as I stated before, oil trades at a churn-multiple an order of magnitude greater than that of the UK gas number you found (= 14x, which is in fact the 'gross', counting both sides of the deal separately; would often be stated as 7x).

powerman said...

Cars being a blight is your subjective opinion, not mine

"1) Connecting suburbs into communting range raises prices there. They'd be cheaper without communters;"

So where are the people who live in the suburbs supposed to work?

"2) You are not priced out. Your expectations are too high;"

Really, how do you know what my expectations were? And why should my housing choice defer to your dislike of cars ? Shouldn't we both just spend our own money as we see fit and leave each other alone?
"
3) Stretching out life with the motorcar has made society extremely vulnerable to high oil prices."

Public transport is vulnerable to high fuel prices too, and it's often much more time consuming to use, because it can't, by definition, take you from door to door. Reliance on public transport also puts us at the mercy of public transport unions. Most of the price is still taxation. Oops, there's another government intervention gone awry.

"4) Pedestrians pay by far the highest price for cars due to the danger, the noise, the gridlock ruining public transport, and the loss of safe roaming for children."

The gridlock has not ruined public transport, unions and poor management took turns ruining transport, where it was appropriate, and it was never appropriate for all people and situations.

electro-kevin said...

Nick (not Drew)

Do you ever find yourself sitting in traffic fuming at why there are so many drivers clogging the roads ?

Just interested

electro-kevin said...

I wanted to keep my kids away from knife crime.

Expectations too high, Nick ???

electro-kevin said...

High petrol tax is nothing to do with congestion or the environment.

It's to bail out a profligate government.

Anonymous said...

"So where are the people who live in the suburbs supposed to work?"

This is a malthusian problem. The existence of cars has allowed people to adopt a lifestyle they wouldn't otherwise have, of which a long commute is one. They have deliberately made a set of life choices that are entirely dependent upon being able to drive everywhere. They did so during a period of unsustainably low oil prices and where many of the costs were externalised. With so many people doing it, we had a classic prisoners dilemma.

Now things are swinging the other way. The small geography of the UK means we won't have literal ghost towns like California but we'll have lots of hardship.

But this is the natural consequence of building your entire lifestyle around a single unsustainable input.

Expectations are too high. If you expect a three bedroom house and garden without a commute, but don't have the income to pay for it, then they are too high.

Nick

Anonymous said...

"Do you ever find yourself sitting in traffic fuming at why there are so many drivers clogging the roads ?"

I don't drive. I paid a premium on my flat rental (or a compromise in its quality - depends how you measure it) in order to live walking distance from work. I didn't want to be reliant on cars or public transport so I made the necessary trade off.

It's why I have no patience for whiners now that petrol is going up. They made their choices and now they have to take the rough with the smooth.

"I wanted to keep my kids away from knife crime."

You own blog (which I read often) makes it pretty clear that the causes of knife crime are not being close to a City, and that it's only certain parts of Cities affected. Live somewhere smaller in a nicer neighbourhood or accept the high petrol price and hideous commute.

Nick

electro-kevin said...

And if we all do that, Nick ? (Move closer to work in safe areas)
What happens to property values in those areas then ?

That's not a realistic proposition.

I live in a modest 3 bed semi on a dowdy estate as it is.

Roads policy, rail policy, housing policy, immigration policy, supermarket development policy, parking policy, destruction of town shopping policy, Theme park development policy ...

all created by - or with the approval of - government with the onus on private transport. NOT OUR FAULT.

So now Gordon Brown is to tax me punitively (I don't fly, waste food or have a gas guzzler btw) at a level at which he knows I am going to HAVE to afford but for which he knows I cannot adjust my activities.

What does this achieve ? Less travelling on my part ?

No - less expenditure elsewhere and less spending power on my part. More revenue on his part and we all know why he desperately needs it.

The unintended consequence of your desire for punitive taxation on skilled and educated people who are simply trying to achieve a decent quality of life despite mismanagement by government is that people with the requisite finances and skill-sets will quit Britain.

We're being hammered to pay for chavs. Brown's true attitude to environmental issues is manifest in what he ate at the G8 banquet. What he thinks of us is manifest in his refusal to hold a promised referendum on the Lisbon Treaty.


PS, Chuffed to bits that you bother read my blog. That's nice of you even if you don't like it.

Kevin

powerman said...

"This is a malthusian problem. The existence of cars has allowed people to adopt a lifestyle they wouldn't otherwise have, of which a long commute is one."

But I don't have a problem with the commute big enough to want it to be taxed into impossibility. You want to re-engineer my lifestyle for me by government force. I don't want to do the same to you.

" They have deliberately made a set of life choices that are entirely dependent upon being able to drive everywhere."

You've made lifestyle choices around not wanting to drive, which I'm fine with. Why do you feel the need to make the 'correct' choices for me ?

" They did so during a period of unsustainably low oil prices and where many of the costs were externalised. With so many people doing it, we had a classic prisoners dilemma."

Not really.

"Now things are swinging the other way. The small geography of the UK means we won't have literal ghost towns like California but we'll have lots of hardship.

But this is the natural consequence of building your entire lifestyle around a single unsustainable input."

What do you mean by 'unsustainable', exactly?

"Expectations are too high. If you expect a three bedroom house and garden without a commute, but don't have the income to pay for it, then they are too high."

I never expected one without a commute, so I chose to commute.
I don't see why I should be punished financially for this choice by the state (which will almost certainly fritter the money away on another stupid scheme anyway).

Anonymous said...

powermam,

That's why way up at the top of these comments I was saying why cars are a problem for laissez faire types such as myself. It's difficult to reconcile the theory ("let people make their own choices") with the reality (a country wrecked by overuse of cars, with all kinds of externalities that the drivers aren't having to include in their decision making).

Nick

monoi said...

Nick,

Your vision is a bit simplistic.

Car drivers can also be pedestrians, cyclists, users of public transport, living in town, etc...

Everything in life has a cost or can create an inconvenience for others, but that is life. Before it was horse manure. I also think you are mistaken when you say that externalities are not paid for by motorists.

powerman said...

"powermam,

That's why way up at the top of these comments I was saying why cars are a problem for laissez faire types such as myself. It's difficult to reconcile the theory ("let people make their own choices") with the reality (a country wrecked by overuse of cars, with all kinds of externalities that the drivers aren't having to include in their decision making).

Nick"

My point is that 'the country being wrecked by cars' is actually your subjective opinion. I don't think the country has been wrecked by cars. I really don't mind seeing them drive past where I live. I much prefer to drive to work that catch two buses with a substantial waiting time between them and then walk a mile at the end.

I think the problem is stupid urban planning and awful management of our railway system. Our coaches and internal flights are both efficient, generally comfortable and cost-effective for many journeys. I always travel to London by coach.

I don't believe that increasing fuel duty has anything to do with making motorists pay for 'externalities', and everything to do with soaking people irrespective of ability to pay to prop up profligate spending.