IMI Magazine

Over a barrel

It’s hard not to have a wearying sense of déjà vu over the latest fuel crisis. We’ve seen it all before. Soaring oil prices, queues at the pumps, go-slow protests and striking tanker drivers. We’ve got a beleaguered government and even an old-fashioned ’70s-style union man in Ron Webb, national officer of Unite, the Shell drivers’ rep. It’s 1974 and 1979 all over again.

Or is it? Many of the elements that caused those earlier crises are the same, most notably unrest in the Middle East. But there also seem to be some significant differences. Oil producers claim that soaring demand from emerging markets, notably China and India, is behind the price spike. This is a convenient argument, and one that can be backed up by statistics. China’s car market pre-2002 was just a couple of hundred thousand cars a year; now it’s second only to the US, at around 8 million vehicles a year.

But the oil industry’s figures do not back up the argument that emerging market demand is forcing up prices. According to the US Energy Information Agency, Chinese oil consumption is still well below that of the US. In 2007, China imported 3.2m barrels of oil per day, said the EIA, and its estimated usage was around 7m barrels per day. This is around one third of US consumption (around 20.7m barrels per day).

Chinese oil consumption is rising – the EIA estimates it will grow by 400,000 barrels a day this year. Significant, but hardly the sort of surge in demand that has led to a trebling of oil prices in 12 months. Meanwhile, as the credit crunch bites, US oil demand is expected to decline by 190,000 barrels per day in 2008 as motorists trade their SUVs for hybrids, cancelling out half of the Chinese demand growth.

'Flat' demand
This view is supported by the Organisation of Petroleum Exporting Countries (OPEC), whose 2008 global oil demand forecast is largely unchanged against 2007 at 87m barrels per day. Stronger demand from China, the Middle East, India, and Latin America will be cancelled out by falling demand in the EU and North America, OPEC says. So oil demand isn’t surging at all – in fact it’s rather flat.

The other argument that’s frequently trotted out is that we’ve passed the point of “peak oil” – we’ve used up more than half the available resource on the planet, and effectively from now on, the oil is running out. But again, this argument is flawed. Saudi Arabia is continuing to open new oilfields. Brazil has discovered vast oil reserves off its coast. Iraq has untapped resources. Even in the US, new fields are being discovered.

OK, it may be more costly to extract the oil from these new fields. But that financial equation becomes more advantageous for the oil giants as the price rises – the cost of extracting the oil doesn’t double when the price per barrel doubles. It seems we’re some way off the “peak oil” point.

So if demand isn’t surging, and the oil isn’t running out, what’s forcing up prices? A lot of the blame has to fall on our friends in the US financial markets. Without going too deeply into the minutiae of the US futures markets, it seems it’s possible for investors to take a speculative punt on oil prices, using borrowed money – which has the effect of forcing up prices. This could be stopped by regulation, but that’s unlikely to happen until after the US election and only then if the Democrats win. For the time being, speculation in oil futures will continue unabated – until a fall in demand forces down prices.

Bad news for Europe
And as global demand is flat, that won’t happen immediately. Even if oil demand slumps in the west, growth in emerging markets will keep the market in balance. Which is bad news for us in Europe. High oil prices will be with us for a while. In 1974, when pump prices went from around 35p a gallon to 75p almost overnight, they didn’t drop back to 35p a few months later. In fact, they kept rising.

Fuel is a commodity – its price is not very elastic. We need to fill up our cars and trucks. Most of us can only make small reductions in petrol or diesel consumption by cutting out journeys, using public transport, or buying a more fuel-efficient car.

For road hauliers, it’s even harder. British hauliers face ‘cabotage’ competition from operators based in other EU countries, whose trucks are filled with cheap EuroDiesel from Belgium and who pay no taxes to the UK exchequer. This will get worse with EU plans to deregulate road transport from next January. The Freight Transport Association has calculated that foreign hauliers running on cheap fuel have an 8% cost advantage compared to a UK haulier, in an industry where profit margins are typically 2 to 3%.

Haulage blow
The hardest-hit are long-established family haulage businesses. The Government needs to help them. But instead, Gordon Brown’s increasingly moribund government is still pressing ahead with its budgeted 2p per litre fuel tax hike, pushing UK fuel tax even further above the EU average.

These operators have a genuine grouse – more so certainly than the Shell drivers, whose strike action was based round a pay claim, and whose disruptive action was, to say the least, opportunistic in the current climate.

The FTA wants to see UK fuel duty cut to somewhere close to the EU average of 25p per litre. While the current government is unlikely to do this, a more sensible action would be to extend the essential users fuel duty rebate that applies to bus operators to road hauliers. This is significant – around 20p per litre. And while the government might argue that extending the rebate would lead to a drop in revenue, it’s clear that would be balanced out by the extra VAT that’s already being collected as a result of higher pump prices.

Many believe the government should use fuel pump pricing as the principal way of collecting all forms of taxation relating to vehicle use. So road fund licensing could be done away with, avoiding unpleasantness such as the proposed retrospective “gas guzzler tax” – higher VED rates applicable to vehicles built as long ago as 2001, based on CO2 emissions.

Mechanism in place
Raising taxation entirely through fuel duty should be more equitable – it’s effectively a simple way of implementing a pay-as-you-drive scheme. And it would actively encourage high-mileage drivers to switch to more fuel-efficient cars – which tend to be greener in any case – avoiding the need for complex, CO2 emissions-based taxation bands. The mechanism for collecting the revenue through the VAT system is already in place.

It would mean higher pump prices, of course, and this would hit people living in rural areas. Here, perhaps the ‘essential users’ rebate could be extended to those affected who do essential work – the district nurses and country GPs, for example.

It’s the sort of radical thinking that is needed. The game has changed, and it’s not going to change back in a hurry. When the sun was shining on the British economy, the motorist became a soft target. The climate change debate – and it’s still a debate, regardless of the shrill views of the environmental lobby – made the motor industry a soft target. And when the sun was shining, perhaps the motorist was prepared to accept some of the financial burden for saving the planet.

But not when their livelihoods are at stake. Now it’s time to widen the debate.

Mark Bursa