| Product: |
UK Petrol Prices |
| Date: |
15.04.08 (154 review reads) |
| Rating: |
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Advantages: Reduction of negative spillover effects
Disadvantages: Potential damage to the economy
There is plenty of reason to be worried. But should we really be so outraged?
The difficulty is one of fairly simple supply and demand. We all drive to wherever we need to go, and because it makes life really simple we are happy to burn vast amounts of petrol and ignore the consequences. Furthermore, because we rely so heavily on fuel for everything in our daily lives, we will not cut back hugely on our consumption of it even if the price goes up. And up. And up.
Couple this with dwindling supplies made even smaller by limitations agreed upon by OPEC (Organisation of Petroleum Exporting Countries), add about 50p of tax for every pound spent on petrol, add a few more pence that the petrol company thinks they can squeeze out of you and there you have it: the price you pay at the pump. It's very high.
Unfortunately, there's little to be done about supply and demand. Supply is limited by the earth's resources and the abilities of drilling companies to get the oil out of the ground. Demand will inexorably rise as the world's population increases and countries become more developed. Thus there are only two missing links when it comes to the question of why the price is so high: tax and technology.
The question is this: when we pay road tax and value added tax and income tax and council tax already, why do we need to slap a hefty fuel tax on top as well? According to the Association of British Drivers (ABD), remove all the tax and currently a litre of petrol should set you back about 40p. Instead prices are rapidly nearing £1.10 a litre. If road tax has paid for the maintenance of the road, and VAT has helped the government provide the services we rely on in every day life, what does fuel tax pay for?
In economics there is a concept known as externalities. This is the idea that consumption of some goods can have unintended consequences - good or bad. Eat a banana and you'll be (potentially) happier and healthier. What you didn't intend though when you bought it was the saving to the NHS of not having to look after you as much, or the saving your boss makes when you take fewer days off sick. The same goes for petrol: you put it in your car to benefit yourself. Unfortunately, it harms others, and this is where the high tax rate comes from - partly to reduce the amount of petrol burnt and therefore the amount of unpleasant emissions, and partly so the government can spend the money on repairing the damage you do to people's health and the environment when you drive your car.
It is important to realise that you do have the choice to not buy petrol if you consider the price too high. Like it or not, every time you go to the petrol station, grumble about the ridiculous price and fill your car up, you have just agreed that given the benefits of that petrol to you, the price is acceptable. A similar concept can be applied to the government's fiscal policy - you might think the government's only motivation when taxing you is to extract the most money they can without getting voted out of office, but this (assuming the government has at least some understanding of economics) is not true.
Petrol consumption strangely has positive spillover effects as well as negative ones. Driving to work in the morning may save you the hassle of getting up early to get the train, but it also is likely to increase the output you achieve for every hour worked; your productivity. Arriving at work happy rather than tired and stressed will be a great benefit to whoever you work for, and probably for those around you too. This means more money for the business, more money for the government in tax revenues and a stronger economy. China and India's explosive growth at the moment is fuelled by vast consumption of fossil fuels - burning petrol is destroying the environment, but at the same time it is lifting millions out of poverty each year.
This is why the tax is high, but not higher: the government doesn't want to shoot itself in the foot either way. If petrol prices are too high then our economy, which runs largely on petrol, will have great difficulty competing on the world market. If they are too low there won't be much left of the country to compete with: everyone will have been wiped out by the photochemical smog.
Technology is the other reason for high prices, as well as being affected by them. We demand petrol; therefore we demand cars that are powered by petrol, which is why there are so few decent electric cars on the market at the moment. However, as fuel prices rise, technology will shift in favour of renewable energy, electric cars and so on. The tax on petrol reduces petrol consumption therefore it reduces demand for anything powered by petrol, which the government would rather did not exist, but cannot ban entirely because the economy would be wrecked as a result.
Therefore, although petrol price rises are undeniably bad in many ways, there is little point complaining as I'm pretty sure they're high for good reasons. A far better strategy would be to buy an electric car, killing two birds with one stone - firstly you won't have to pay for petrol any more, and secondly your demand for a vehicle that doesn't use petrol will spur improvements in electric car technology so that others switch over, demand for petrol falls, and so petrol prices fall too.
Or of course you could design one yourself. Necessity is the mother of invention after all.
Summary: Petrol price rises are certainly not good: but they may not be too bad either.
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