It’s All Relative

By Laura Gillies

Energy prices are creating headlines all over the world, which in turn translate to much higher petrol or gasoline prices, which are adding to the global inflation phenomenon. This inflation pressure is being felt in real terms by low- and middle-income households globally. In real terms, in countries such as the US, which are highly dependent on motor vehicles for transportation, it’s causing real hardship. This spike in energy prices is making it hard for families to heat their homes and fill up their cars for daily commutes to work. According to Claire Ballentine from Bloomberg, it is “likely to make other aspects of everyday life more expensive for average consumers. Because oil underpins the crucial aspects of the economy like shipping and the manufacturing of plastics, almost no industry is immune.”

Energy prices clearly have a massive effect on the entire economy. In fact, it is leading to less driving and beginning to reduce the demand on gasoline. This will have a real lifestyle impact as we come into the traditional summer driving period where people normally travel significant distances for vacation. However, there are various factors which ultimately affect the prices of energy derived products such as gasoline, which cause significant variations in local pricing. This in turn means the relative impact in different geographies can be quite significant. 

There are several things which impact the price of petrol or gasoline. Prices of Brent and WTI Crude oil have been more than $100 per barrel, which is the highest they have been in the last five years. Crude oil prices are being driven both by lack of investment in production over the course of the pandemic, particularly in the US, but more significantly by events being taken place in the Ukraine as sanctions are being imposed by the West on Russia. Although the US doesn’t depend on Russia for oil, the price of oil is set globally. This is often referred to as the ‘war premium’ on oil prices.

Russia also exports large quantities of refined products such as petrol and diesel. Again, given the sanctions, the market is being starved of the products and the prices of the remaining products is being pushed upwards driven by fear of shortages. 

The final factor impacting the price of refined products is that many governments rely of taxation of these products as a source of revenue. The amount of taxation varies considerably between jurisdictions.

There is enormous variability between countries in terms of taxes imposed on gasoline or petrol. Europe in general tends to have higher taxes on fuel than anywhere in the world, the UK imposes the highest tax duty of all Organization for Economic Corporation and Development Countries (OECD). Contrastingly, the US has one of the lowest fuel taxes in OECD and as a result of those two extremes gasoline taxes in the UK are more than ten times that in the US. Despite that with recent events there is probably more public disquiet in the US than there is in the UK. 

Even withing the US regional gasoline motor fuel taxes vary considerably with the East and West Coast States experiencing higher fuel tax rates than the other regions. This, then in turn, causes regional differences in the fuel cost to drivers and can and is cause differing impacts in terms of the amount of driving being undertaken particularly given high inflation being experienced by consumers across a wide variety of goods and services. 

So, Southern states, like Texas, which is a significant oil producer, are noticeably less impacted than western states such as California where higher duties are applied. However, it is all relative. European countries’, in particular the UK’s, where oil trades on a Brent basis which is higher than the US WTI benchmark, shortage of refined products due to the Ukrainian situation and relatively high fuel duties, make for the most expensive driving in the world. The bottom line is in March 2022, a US gallon of gasoline, in Texas, is going to cost less than $4, whereas in the UK it’s going to cost closer to $8 per US gallon. It’s all relative! 

The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.

Photo by What Is Picture Perfect on Unsplash

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