Should taxes be used to reduce swings in petrol prices?

antrobus

TrickyTree83 wrote: »

But that's based on the premise that they will continue to fluctuate up and down, when the reality is that (at least eventually) they will increase over time as the resource becomes more scarce....

I think it's pretty much a certainty that oil prices will continue to "fluctuate up and down" for the forseeable future. It is determined by supply and demand now and over the next year or so, and that's always changing.

vivatifosi

No - price is an important market signal to drive the correct allocation of resources

I voted no. My reasoning is that I can see how compare what I'm paying to prices per barrel (ok, this still needs to be refined so is not an exact surrogate), but is a good indicator of how quickly fuel companies put down prices as well as up.

I think that this would be opaque under a situation where taxation was flexible, with the result that pricing would be less competitive, not more. Fuel companies know that the demand for fuel is relatively inelastic, therefore I don't want to give them any reason to be less price sensitive.

michaels

Yes, using taxes to reduce fuel price fluctuations (whilst keeping the same overall tax) makes sense

With the number of retailers and supermarkets and obvious big sign pricing I can't see competition allowing prices to rise - it is just the duty that will change basaed on the brent crude price.

Thrugelmir

What are you on about, Michaels?

michaels wrote: »

With the number of retailers and supermarkets and obvious big sign pricing I can't see competition allowing prices to rise - it is just the duty that will change basaed on the brent crude price.

And if the oil is shale from the US or Saudi Arabia or currently stored in one of the many tankers offshore?

wotsthat

michaels wrote: »

With the number of retailers and supermarkets and obvious big sign pricing I can't see competition allowing prices to rise - it is just the duty that will change basaed on the brent crude price.

Decent ONS link here

http://visual.ons.gov.uk/fuel-prices-explained-a-breakdown-of-the-cost-of-petrol-and-diesel/

At £1.10/ litre 70% of the cost is VAT and duty. Competition keeps prices competitive (and retailer margins low) but competition can't force the whole retail sector to work on negative margins.

Also reference whether the current price is really the correct price to fix at...

Perhaps unsurprisingly, the plunging cost price of oil and the corresponding cut in the price in the pump has impacted our purchasing behaviour: in 2015 the amount of fuel we bought at the pump increased by 7.6% on the previous year, according to the Office for National Statistics’, Monthly Business Survey (Retail Sales Inquiry).

Maybe fix at £2.10 - £2 to reduce consumption and drive innovation and 10p to run the government's fuel stabilisation department

michaels

Yes, using taxes to reduce fuel price fluctuations (whilst keeping the same overall tax) makes sense

wotsthat wrote: »

Decent ONS link here

http://visual.ons.gov.uk/fuel-prices-explained-a-breakdown-of-the-cost-of-petrol-and-diesel/

At £1.10/ litre 70% of the cost is VAT and duty. Competition keeps prices competitive (and retailer margins low) but competition can't force the whole retail sector to work on negative margins.

Also reference whether the current price is really the correct price to fix at...



Maybe fix at £2.10 - £2 to reduce consumption and drive innovation and 10p to run the government's fuel stabilisation department

£2 - ouch

My reason for introducing a 'fix' - actually just dampening movement - is to avoid a macroenonomic (whole economy) impact from the sharp swings we see in the oil price. AS mentioned above, demand is pretty price inelastic and UK demand is negligible in terms of world demand so our moderating our usage does not lead to price rises being held back.

I was thinking of a reference level at about £1.25 (or perhaps whatever the real terms average over the last 10 years was) so we would want to see a fairly quick increase in duty to take us to 1.18 (Half way between 1.10 now and 1.25 reference level) and then make regular adjustments so that swings away from 1.25 were only half what they would be otherwise.

steampowered

No - price is an important market signal to drive the correct allocation of resources

I was thinking of a reference level at about £1.25 (or perhaps whatever the real terms average over the last 10 years was) so we would want to see a fairly quick increase in duty to take us to 1.18 (Half way between 1.10 now and 1.25 reference level) and then make regular adjustments so that swings away from 1.25 were only half what they would be otherwise.

In my mind, the difficulty with this is that the reference level can change and you don't know whether £1.25 is the correct reference level.

For example, the cost of oil may increase over the long term. The cost of drilling is not a constant. Some of the most easily accessible oil sources (such as shallow onshore drilling) have been depleted. Over time you'd expect more oil to come from deep water drilling which is much more expensive.

If oil prices did increase over the long term, how would the stabiliser work? I suppose you'd have to re-adjust the reference level (and have a sudden price jump) every couple years.

michaels

Yes, using taxes to reduce fuel price fluctuations (whilst keeping the same overall tax) makes sense

Since 1960 it would appear there have been 4 major recessions in the UK. 3 of them were preceded by a sharp rise in oil prices. I accept that an oil price stabilizer is far from optimal economics however if it made no difference to overall growth but just reduced the variability ('no more boom and bust') wouldn't most people prefer it?

vivatifosi

No - price is an important market signal to drive the correct allocation of resources

Is there a likelihood of that happening again though, given:
1) The OPEC cartel's strength has been broken by new production, eg shale oil in the US; and
2) The oil company oligopoly has been disrupted by supermarket petrol?

I still don't like opaque pricing though, or giving the government additional freedoms to tax inelastic spend (they'll always renege on the equal value equation at some point).