One of the staple complaints that all of us have in western societies – not limited to Ireland by any means – is price gouging at the fuel pumps. When the price of oil spikes, you can expect to see an almost immediate increase in prices at the local filling stations. When the price of oil falls, we are told that it will take time to feel the benefits, because oil is purchased in advance on futures contracts and it can take months for the cheaper fuel to hit the forecourts.
This is, obviously, illogical: If fuel is purchased (as it is) ahead of time via futures contracts, then self-evidently a price shock should not be felt contemporaneously.
This, a few times a decade, gives politicians a rare chance to call for something popular: Laws against so-called “price gouging” that would tie the price of fuel to the cost of acquiring it. All of us, this writer included, would welcome such a law on a moral basis.
The problem is that it is simply a bad idea: Price-fixing is price-fixing, no matter how many different names you give it, and it is and always shall be bad economic policy.
It is a bad idea first of all because, counter-intuitively, what we call price gouging often is not price gouging at all. Yesterday, I spoke to a manager at a large regional wholesaler that supplies home heating oil to households. He told me that on Monday morning, they had four times their normal level of calls for this time of year, asking for home heating oil refills, which he linked to the war in Iran starting over the weekend. In essence: Price shocks cause a spike in demand, which in turn cause a shortage in immediate supply, which in turn drive up prices because retailers and other suppliers need unscheduled additional supplies. I was unable to speak – despite attempts – to a retail fuel supplier for cars, but can confirm the receipt of a text message from a family member over the weekend urging me to “fill the car” on Monday morning because of impending price shocks.
The other point that must be made here is that in Ireland, while there is no price ceiling on fuels, the Government has imposed a price floor. That is because it is illegal for anybody in Ireland to sell you a litre of diesel for any price lower than €0.76. That seventy-six cents is the excise duty and carbon tax on the diesel (sixty one cents) plus the VAT at 23% on top of it. Even if the diesel itself was entirely free, and nobody from the oil company to the importer to the distributor or the retailer was charging a cent, that is what you have to pay the Government on a litre of diesel when you buy it.
The extra euro in a €1.76 litre of diesel is divided between those four groups. The Government takes the single largest share. It should also be noted that it is not even just an extra euro, because VAT is charged on the retail price as well. Add that in, and almost 50% of every litre of diesel sold is tax.
This has the net effect of magnifiying relatively small price increases by the supplier and the retailers. While our politicians are blaming the forecourt owners for the price increases, the Government is taking the largest single share of the money.
As Laura wrote yesterday, in a piece that proved very popular with readers, this means that Government has other mechanisms to lower the cost of diesel should it wish to, rather than interfering with the normal process of supply and demand. The Government, last year, collected €2.73billion in Mineral Oil Tax, which is the tax it collects on fuel you buy to power your car or heat your homes. The most recent exchequer figures project a total Irish Government surplus this year of over €5billion – meaning the Government could, if it wished, eliminate fuel duties altogether and reduce the price of a litre of diesel down to something around €1. It could do this without cutting a single line item of expenditure elsewhere.
This might be considered extreme and unwise (once you get rid of a tax, you might have to reimpose it later if you need the money) but there is certainly far more scope for relief at the pumps from the politicians than there is from the fuel suppliers. Nobody could offer bigger savings more quickly, and nobody in the price chain could better afford to.
But of course, as Laura pointed out, the primary reason for fuel taxes in Ireland is not financial. It is ideological: The Government wishes us all to use less fuel for climate change reasons. It is not likely, then, to address the rising costs.
Instead, it passes blame on to suppliers, many of whom are family businesses or small companies responding to a demand shock with relatively small price increases that are magnified and made bigger by the Government’s tax laws.
In recent days Independent Ireland and Aontu have sought to make an issue out of this. They are right to do so. It is the state, not the suppliers, who are price gouging at the pumps.