Political populism doesn’t necessarily head to bad economics, but this push to cut fuel prices by either cutting the excise or the GST does fit the “populism is bad economics” mould.
There’s no doubt that the petrol price is hurting, but the main reason it’s hurting so much is because households are squeezed by excessive debt. With debt repayments taking about 15 cents out of the average household disposable dollar, versus a mere five cents a few years ago, there’s just less room to cope with a cost jump like oil. But directly tackling the oil price by slicing off the tax levels has the feeling of King Canute commanding the tides to turn.
The bowser cost of petrol is also only about a third of the transportation costs alone involved in our use of oil. Virtually everything produced today has oil as a component in its production — even computer chips have materials made from oil. This tax cut would be a visible change while the dominant cost pressures would remain invisible, but far more potent.
Oil is running out. The advocates of what is known as “Peak Oil” have been making the case about oil running out for decades now. The wheel, so to speak, has finally turned in the direction they forecast long ago, and fiddling with tax rates won’t increase the amount of oil left in the ground, or the efficiency of its extraction.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Making petrol artificially cheaper now isn’t going to stop it running out — it might simply accelerate that trend.
The alternatives that can keep the gas guzzler as our main form of transportation just aren’t going to work out either. Oil shale was touted as an alternative, once petrol got expensive enough for its extraction to be commercially viable. But now it’s not greenhouse gas viable to do it.
We’ve also seen the impact of trying to grow our oil — ethanol production up, food prices up even more, and riots in starving populations around the world.
There is also a mass of speculation overlaid on top of this real supply driven dilemma. There’s a possibility that, if a serious economic downturn hits the USA and the rest of the OECD, that the oil price will collapse as speculators are forced to unwind their positions. How would this temporary palliative to oil consumers look then, especially if we undercut our tax base at a time when declining income tax revenues amplified the scale of government deficits?
Ultimately, this is a “chicken little” debate — politicians grabbing an easy option for a difficult problem, and running around in front of the cameras fast enough to look like they’re doing something significant. Addressing the challenges of moving to a non-oil dependent economy are a lot more difficult than cutting a few cents off the top of a tax.
Professor Steve Keen is the author of Debunking Economics.