Higher petrol prices are better for us in the long run

Thursday, 11 October 2018

Kiwis are looking for alternative forms of transport as petrol prices reach record highs.

OPINION: The price of fuel is dominating headlines. Prices have increased sharply in a short time, Prime Minister Jacinda Ardern has accused petrol retailers of gouging, and global experts have warned we only have a decade to curb fossil fuel use to avert catastrophic climate change.

Increases in government taxes have been a small part of the price hikes. Changing market conditions - which we can't control - have been the dominant driver. But we need the taxes to improve our infrastructure and we need higher prices to avert calamitous climate change.

So there is a silver lining to higher petrol prices, but by golly it won't feel like it when paying at the pump.

High petrol prices have prompted various protests from motorists.

Of the 40 cents a litre increase in petrol prices over recent weeks, about 30 cents of that has been due to a combination of rising crude oil prices internationally and a weaker exchange rate (which makes imports dearer).

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The remainder has been adjustments in retailer margins, changes in discounts and an increase in taxes of about 9 cents.

Shamubeel Eaqub can feel your pain but argues that high petrol prices may be a necessary evil.

Some international analysts predict the price of crude may reach US$100 a barrel. Say that happens and the New Zealand dollar fell from, say, US65 cents to 60 cents. That would further spike the price at the pump from around $2.30 now to more like $2.80 a litre.

If the currency fell to say US50 cents, like it did during the global financial crisis, then prices could hit $3.20 per litre.

An increase in the excise and the recent introduction of the Auckland regional fuel tax, at the same time as rapidly rising prices, has of course caused a furore. Last week's news of a larger-than-expected tax take and government surplus makes it look ever more like a tax grab.

But there are some tempering arguments. The excise and regional fuel taxes are specifically raised to invest in our long-neglected transport sector.

By my reckoning, we have been under-investing in public infrastructure since the 1980s. There has been an improvement since the early 2000s. But that hasn't been enough to fill in the deficits which have accumulated over many decades, nor kept pace with growing and changing needs.

If we want a better infrastructure, we have to pay for it somehow. At the moment, we largely do it through taxes on fuel. The government of the day always has other options - public-private partnerships, for instance, or to borrow to pay for new projects. But despite decent fiscal settings and cheap borrowing costs, the Government is currently choosing not to borrow.

Perhaps to lessen the criticism, it has promised to fast-track new powers for the Commerce Commission to look into anti-competitive behaviour across specific markets. Fuel retailers will be top of the list. This will take time, but these new powers could prove to be a real worry for many industries in New Zealand which tend to be dominated by a few large players.

The furore over petrol prices ironically coincided with the release of the latest IPCC report on climate change. It was stronger in its language than earlier reports and said we have a decade to make drastic changes in our fossil fuel use and other emissions, or suffer the consequences of drastic climate change. The urgency was stark.

Also last week, the Nobel Prize in economics was given to two economists whose significant contribution was how to tackle climate change. Their work suggest that we need very high prices to send a strong signal for us to change our ways.

If we are to wean ourselves from our dependence on oil, surging prices will help. But we also need alternatives. Which makes it even more important for our country to keep investing in public transport and road infrastructure, to make a shift to electric vehicles and other technologies.

Rising petrol prices will hurt. But last week's events suggest this is a bitter pill we need to swallow.