Fun with Fuel Subsidies and Taxes
Posted by Prof. Goose on June 3, 2008 - 8:00am
This post was inspired by a post over at Paul Kedrosky's place entitled Fun with Fuel Subsidies, in which he put up these two graphics and said "Discuss." Now I am doing the same here.
Two figures (via the Economist and FT, respectively, click graphics to go the stories--at FT click the "view map" in the graphic once you get there to see the interactive map that this picture was taken from) that show the world of fuel subsidies worldwide:
“What gets us into trouble is not what we don't know, it's what we know for sure that just ain't so.”
—Mark Twain
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I wonder why China isn't shown as a subsidizer? It is through state controlled refining. I agree that subsidies won't last much longer. I can't help but wonder when world demand will begin to drop. Is it possible that price will regulate a slowing demand sufficient to result in a gradual decline of consumption rather than the much touted falling off a cliff?
I'd like to see that chart in a years time.... and the year after .... and the year after ...
I wonder if the difference with the US retail price of around $1/L could be equated with a subsidy if it is lower and a tax if it is higher. For example $1.25 tax for the UK and 40c subsidy for Mexico. The reason being that refined fuel is somewhat fungible with 'opportunity costs' of selling elsewhere.
The obvious problem is volume decline vs financial capacity of the government to either keep subsidising or rely on fuel tax revenue. It seems unlikely fuel taxes/subsidies can continue this way for more than a few years. In an extreme powerdown scenario when there are just dilapidated pickups running on 'moonshine' there will be little need for governments anyway. Even if fuel taxation switches mid-term to carbon content rather than revenue needs that will have to phase out eventually. Some kind of hybrid system needs to be devised that covers all bases.
Hello TODers,
I would encourage TODers to also consider all the countries that subsidize I-NPK below the going market rate--this won't last much longer either as the price of I-NPK is double whammy related to FFs' costs. Job specialization is dependent upon food surpluses, but grain stockpiles have been shrinking steadily.
Have you hugged your bag of NPK today?
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
hi Bob, I didn't hug any bags today - but I would if I had one :-)
Now,you have a lot of knowledge on I-NPK situation and various stuff in general. And I definitely share your worries concerning the ramifications for the future on the same.It is probably a very under communicated issue (for what I know) , anyways..
Q: Have you got a link to Un/FAO or other body who maintain some sort of real-time stockpile numbers for grains ?
thx upfront
Hello Paal Myrtvedt,
Thxs for responding. Nope, I don't have any realtime links. I just google away like everyone else. I gotta admit that it sure would be nice to have a personal satellite to spymap the critical info early.
The USDA periodically releases critical farming reports, but the secrecy level beforehand is tighter than a drum... No cellphones, no laptops, no briefcases, windowless room, etc... because advance info would be worth bigbucks to grain traders.
They had a problem a few decades ago when someone gave advance market info by subtly re-positioning a window blind to indicate grain market trends.
http://www.kansascity.com/business/story/645115.html
-------------------
Soggy spring produces poor corn crop and high costs
In a year of rising food prices and high fuel costs that are creating pressure to produce more ethanol, the country could really use a perfect corn crop.
So far, it isn’t happening.
And depending on the right mix of sun, heat, rain and cool, it could drive prices up even further...
-------------------------
Time will tell.
thx Bob. I didn't mean literally real-time, but more like monthly or half-yearly or so, just some updated reliable souce
In high tax countries like Britain and Germany, a 100% increase in the price of oil translates to only a 40% increase in the pump price. Demand destruction doesn't happen but, over time, the balance of payments is ruined. That means the currencies of high fuel-tax countries should depreciate relative to the currencies of low fuel-tax countries, as the latter cuts consumption faster in response to higher prices. Unthinkable as it may seem, the dollar may regain some weight against the euro.
In the high tax countries it is a percentage of the price, and so goes up proportionately.
Governments there are dependent on petrol tax, and if demand dropped would still need to raise just as much money or go bankrupt.
The tax is not a percentage, it's a fixed levy. In Britain/Germany/Netherlands, fuel duty is fixed at £0.50/€0.68/€0.65 per litre of petrol. A proportional value added tax (17.5%/19%/19%) is added on top, so this part is variable; but business users generally don't have to pay this part (it's a bit like Sales Tax in the US). Large users like the logistics industry are therefore excluded from the variable portion of the tax.
To take a simple example: in Britain, if the price of a litre of untaxed petrol increases 100% from £0.24 to £0.48, then the final cost to the consumer rises from £0.87 to £1.16 - only a 33% increase. This is the increase we have actually seen between Feb '07 and May '08; a 33% increase in pump price for a ~100% increase in oil price.
Thanks for the correction - my bad.
This does raise an interesting issue though.
Demand for petrol has so far been inelastic, and some here have made the point, persuasively IMO, that demand destruction will only really take off when a recession/depression hits.
In Europe Government finances are heavily dependent on petrol tax.
So far to the limited extent that demand has dropped Government revenues have been protected by the VAT component.
If demand seriously drops, as it must in a world with decreasing oil available, and in my view this is likely to occur shortly with recession, then a horse and cart will have been driven through Government revenues.
Either Government spending would have to be savagely slashed, revenues would have to be greatly increased - in economic terms the best way would be to increase the price of fuel still more as this would restrain demand, but in any case taxes would have to go up a great deal, or Government deficits would spiral out of control leading to hyper-inflation.
Under those circumstances it would seem that after a tipping point the high petroleum tax countries would be in an even worse position than the countries which had traditionally had a low tax on petrol.
There are several other "green" taxes, all of which are supposedly intended to reduce consumption of fossil fuels. Excluding VAT, these account for 7.3% of all taxation in Britain. When Peak Oil really hits home revenue from green taxes is bound to fall. So DaveMart, you are right to say that either spending will be slashed or taxes will be hiked, and that the loss of revenue will be worse in high-tax countries.
The rising price of oil will act as a green tax in itself; so presumably the government should reduce taxes as the price rises. A gradual reduction in the tax will allow the government to wean itself off green taxes over time. Fuel taxes should be set like all other taxes - to pluck the maximum of feathers with the minimum of hissing.
(I'm deliberately ignoring the more general issue of decreased revenues and increased expenditure which was discussed at length in the recent article on Local Government.)
I'd disagree with that and say that economically the correct response would be to put all the increase on to fuel.
This would further restrict demand and lower the amount oil exporting countries could get for the oil, so effectively keeping the excess money in the oil consuming nations.
I have my doubts that that will be politically possible though, and even more doubt that in a recession when payments for unemployment benefit etc rise that the result will be other than large increases in direct taxation.
You're right, that does make more sense. As you point out though, it could be politically untenable. Governments can only force down the bitter medicine if their electorate recognize the disease; this requires a well-educated workforce.
hello,
As a consumer who anually consumes energy in both US & France ( a high tax country) I hafta say that my actual experience corresponds to what Drewster is saying. I even noticed this effect last June '07..... that the prices for gas/petrol/essence were going up very-noticably faster ( d$/dt > ) in Vermont than in France.
d$/dt > d(euro)/dt
not a theory, an observation.
sa
That sounds precisely backwards. In high tax countries, especially those with taxes that rise proportionately to the price of oil, consumers acutely feel the oil price, and should consume less. A relatively smaller chunk of the consumer fuel dollar goes to the exporter. A low tax country like the US has a serious balance of payments problem, because consumers consume a lot of oil. High tax economies are forced to become more oil efficient, while those with low taxes, or subsidizes will lag behind on efficiency.
As pointed out above, few if any countries have taxes fully proportional to price. There's usually a fixed whack and then a percentage too.
Second, the folks in high tax countries are already using less. If you're already paying $8/gal, the rise to $9 is going to squeeze relatively less hard than a rise from $3 to $4 per gal here in the states.
In high fuel tax countries the economy has an opportunity to adjust to higher oil prices since the effect is 'damped' by fixed tax rates.
In low fuel tax countries the full rate of rise is passed through, increasing costs swiftly and leading to 'breaks' rather than adaptation.
In both situations the balance of payments tends to go to hell, but at least in the high fuel tax countries they still have working industry to produce export goods to sell to the producers. A country that's industry has gone bankrupt has nothing to sell apart from its assets.
You do point up one thing that is likely though. Countries will impose import restrictions to try to fix their balance of payments.
I think there also has to be some sort of comparison to VMT. Perhaps, a ratio of price/VMT per capita.
Todd
This is an honest question, not an attempt to set up a debating point:
Is it true that taxes are higher on gasoline than they are on Diesel in the EU?
There is no unified system of taxation in the EU. However, some major members such as Germany have lower taxes on diesel than on petrol, and VAT where diesel is used commercially is reclaimable, although so is petrol under those circumstances, I believe.
In the UK the fuel duty is the same per litre for petrol (gas) and diesel but the Value Added Tax (17.5%) is higher because the product price is higher. The VAT is charged on the product price AND the fuel duty so increases the differential.
Today the average price in my area per litre is 117.1p for petrol and 129.7 for diesel.
To overcome oil shortage try the new technologies available to produce oil out of trillions of barrels of oil shale in the world.
Leslie.
The flash graph does NOT show Russia as a top 10 producer, which is a ridiculous mistake to make, since it's the number two in both production and export.
Also, since when does India not subsidise their fuel?
So when will the Saudi and Venezuela's of the world come to understand ELM and increase their local prices to the market rate to cash in on the billions they are currently pissing away?
They could sell the extra from decrease internal consumption on the open market and lower taxes or provide some valuable service far in excess the worth of the wasteful use their citizens currently obtain through the cheap fuel.
Iran is currently doing this by rationing; however, this seems far from an ideal approach...