Under mounting pressure from high global oil prices, the Prime Minister, Kevin Rudd recently declared that there is no ''silver bullet'' to the skyrocketing cost of petrol. The blistering pace of fuel price rises has lead to talk of reducing the excise on fuel. In his budget reply speech, Brendan Nelson proposed a five cent reduction in the excise, leading Joe Hockey to argue that fuel prices would always be lower under a Coalition government. ''We can legitimately and will run the line that petrol will always be cheaper under the Coalition than it will be under the Labor Party,'' he said.
The Government too has begun talking about ways of reducing the tax on fuel. Assistant Treasurer Chris Bowen has flagged the review of the tax system as an opportunity to investigate whether the GST should be charged on the fuel excise.
Although the political parties may disagree on what should be done, there is no argument that action needs to be taken to ease the pain soaring prices are having on working families, especially those on low incomes. CommSec have found the average Australian household is now paying over $205 a month on petrol.
However tempting it might be to reduce the tax paid on fuel, it will not significantly reduce fuel costs in the short term and will make the problem much worse in the long run. There are three reasons for this:
Firstly, Australia already has the fourth-lowest fuel excise in the Organisation for Economic Co-operation and Development, behind the US, Canada and Mexico. Europeans have been paying well above $A2 a litre for years. This means that we are actually more exposed to rises in the price of oil, because so much more of the oil price is based on world prices, with much less representing the tax component. This means the price in Britain has risen much more slowly, percentage wise, over the last 12 months than Australian prices. The higher fuel tax encourages conservation and this means they feel less pain every time the world price soars.
Secondly and perhaps most importantly, petrol is going to get much more expensive, so what is five cents going to do anyway? In 1998, motorists paid around 68 cents a litre, less than half the amount we currently pay. An increasing number of commodity analysts and senior oil executives are now saying that we are approaching a point where we can no longer get the oil out of the ground fast enough and this has caused an imbalance between supply and demand. Serious supply concerns form the basis of the massive increase in oil price we have witnessed since 2002.
The year in which the world discovered the greatest amount of oil was 1964. Since that time we have generally found less and less each year. We have been consuming more oil than we find since 1982. This has reached the point where we now consume four barrels of oil for every one discovered. One leading analyst, from Goldman Sachs, has said we are heading for $US200 a barrel within six to 18 months. This would put the price at the pump at around $A2.33 a litre. A family filling up their four-wheel drive would then have to part with around $210. The four or five cent reduction in the fuel tax starts to look pretty meaningless.
Thirdly, who would pay for the excise reduction? Both the Coalition and the Government's plan would cost around $1.5-$2 billion in lost revenue. This means there would be up to $2 billion less to spend on important government services, like hospitals and schools. With less money available to support such services, attempting to solve the pain at the pump could create new pain in the form of increased hospital waiting times and larger class sizes. It is also important to remember that the wealthy, driving around in their Toorak tractors, would be the ones that would benefit the most from a drop in fuel excise. Let's not forget that many of the poorest in our community do not have a car (up to 30 per cent in some suburbs). They would simultaneously miss out on the fuel excise reduction and suffer the consequences of up to $2 billion less in government service provision.
Lowering a tax that is already very low by international standards is not a smart way of managing an increasingly precious resource. It sends a message that our oil supply is healthy and there is plenty to go around. With forecasts of significant supply limitations from the International Energy Agency and others, we need to start accepting high oil prices and concentrate on reducing its cost to the community by reducing the need to use oil.
The Prime Minister is certainly right to say that there is nothing that he can do about the price of oil. However, it is worth considering the difference between price and cost. Price is what oil's worth on the market. Cost is the amount people actually spend. Thus, whilst the price may soar above $US200 a barrel, the cost can be kept to a minimum by reducing the need for oil consuming behaviours.
The $20 billion infrastructure fund set aside in the recent budget has the potential to make a meaningful difference to the cost of petrol in the long term. The recently established body, Infrastructure Australia, should use their significant budget to reduce Australia's oil vulnerability. Improving the availability of rail to the vast areas of car-dependent suburbs should be a focus. After all, residents of outer suburban areas are on average, less well off than inner city folk. Moreover, they have much less access to high quality public transport. Providing real transport alternatives in the outer suburbs will help working families cope with higher fuel prices. Increasing the provision of high quality cycling infrastructure will provide oil- and emission-free options to those 1.35 million Australians who make trips to work of less than 5km.
These are big challenges and require decades to complete. Failure to accept the reality of this oil shock may lead to a depression beyond anything seen before and the abandonment of oil dependent suburbs. There is no time to waste.
Elliot Fishman is the director of the Institute for Sensible Transport, an independent think-tank providing strategic advice on oil vulnerability. www.sensibletransport.org.au