Opinion & Commentary
Pricey petrol does a world of good
There was a time when supermarket dockets were but fiddly bits of paper that were carelessly crumpled and binned. But a strange thing is happening at checkouts across the country. People are receiving their dockets gratefully, folding them carefully, and saving them safely to get a four-cents-a-litre discount on petrol. Soaring fuel prices have turned the humble supermarket docket from mere bits of paper into hallowed relief from record oil prices.
The high price of oil is changing consumer behaviour and attitudes elsewhere. You can see the signs of this throughout the economy, from queues at petrol stations on Tuesdays to increased crowding on trains and buses. It’s the price system at work: consumers of petrol have responded to high prices by changing demand patterns. The resulting petrol probity is what the government and opposition risk distorting with their simplistic and damaging proposals to cut the fuel excise.
A price is more than just a number: it is a powerful signal to both consumers and producers about the future. When a good is in short supply, its price rises. This signals to consumers that they should use less of it and signals to producers they should make more of it. There is also a signal sent to clever firms and individuals to innovate and come up with substitutes and efficiency gains. All this happens with a simple change of digits. With crude oil clocking daily records, prices are sending a pretty powerful signal, and people are already acting on it.
To see this, start by looking at the effect on demand. We are buying different cars. Last year the Toyota Corolla was the most popular car in the country, breaking the 12 year run of sales leadership by the Holden Commodore. The fastest growing sector of the new car market is small cars. Diesel cars, which five years ago accounted for about 1% of sales, now account for nearly 10%. The second hand car market is also changing. Prices of V8s and SUVs are falling as buyers seek more fuel-efficient vehicles. Bicycle sales have soared.
This is exactly what should happen in a period of high prices. To protect consumers from higher prices using measures that reduce the price of fuel – by cutting the fuel excise, for instance - adds to the demand and leads to higher prices. The old economists’ cliché that the solution to higher prices is higher prices holds true here. Some will no doubt say that taxes on petrol are themselves distortions in price. But because petrol prices by themselves don’t include the cost of pollution, congestion, noise and other externalities, taxes are a justifiable way of capturing those costs and including them in the price.
Producers have responded to changes in the demand for petrol, too. Every major car company now has a hybrid program to supply the market with hi-tech, fuel-efficient cars. Celebrities such as Sting are buying the Tesla Roadster, which is among the few all-electric cars in production, in record numbers. In the US, Honda has just released its first fuel cell car, which emits zero emissions. All these innovations have emerged because of high fuel prices and are proof that price signals are doing their job. Distorting the price signal would reverse these trends and enshrine the dominance of petrol engine vehicles. This would have important implications for climate change as well.
One of the first things the Rudd government did in office was to ratify the Kyoto Protocol, signaling an intention to reduce carbon emissions. Whether it is through a fancy cap and trade mechanism or by other means, the only way to reduce carbon emissions is to pay more for energy. Petrol prices must rise. So why are politicians falling over each other to make them cheaper?
The proposed petrol price tax ‘relief’ is bad policy. This is not only because it will cost hundreds of millions of dollars and barely have an effect on the end user. More importantly, it sends the wrong signal to consumers and producers at a time when high prices appear to be here to stay.
By pretending it can control petrol prices the government is continuing to peddle the lie that it can control everything. It will also perpetuate the illusion that the way we have lived in the past- driving big, inefficient cars- is the way we should live in the future. Prices signal otherwise.
Gaurav Sodhi is a researcher at The Centre for Independent Studies
