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Petrol Price Rises: Causes and Consequences
Richard Webb
Economics, Commerce and Industrial Relations Group
29 August 2000
The rise in petrol prices over the past 18 months
has led to debate about the causes. This Note examines the main components
of petrol prices and the reasons prices have risen.
An accompanying Research Note Petrol Prices-The
Statistics contains supporting data.
Crude oil
The rise in petrol prices, which began in the first half of 1999, is
mainly the result of higher international crude oil prices. Early in 1999,
the Organization of Petroleum Exporting Countries (OPEC), whose members
produce about 40 per cent of world crude oil, announced that its members
would reduce output. These cutbacks to supply and higher demand resulting
from growth of the world economy have boosted crude oil prices. They rose
from a low of around US$10 per barrel in December 1998 to US$25 a year
later and to around US$31 in mid-August 2000.(1) Crude oil
producing countries are thus the main beneficiaries of the rise in prices
while consumers are the losers.
Exchange rate
The second determinant of petrol prices in Australia is the exchange
rate between the US and Australian dollars. World crude oil prices are
denominated in US dollars. Depreciation of the Australian dollar relative
to the US dollar causes Australian dollar prices to rise. The Australian
dollar has fallen from around US 63 cents in March 1999 to US 57 cents
on 25 August 2000, a depreciation of over nine per cent.
Refining, distribution and retailing margins
The profit margins of Australian refiners, and of the distributors and
retailers of refined products are a third component of petrol prices.
The evidence suggests that increased profit margins have not contributed
to higher petrol prices over the past year. The Australian Competition
and Consumer Commission (ACCC) used to set maximum wholesale petrol prices
but, since 1 August 1998, it has had only a monitoring role. In November
1999, the ACCC found that average capital city and average country unleaded
petrol retail prices had increased by less than international prices over
a six month period. Indeed, the study concluded that some of the rise
in international prices had not been passed on to consumers in both city
and country areas.(2)
Taxation
A fourth component of petrol prices is taxation. The price of Australian
crude has been set by world markets since import parity pricing was announced
in the 1978-79 Budget. Since 1 July 1990, the Federal Government has imposed
excise, a petroleum resource rent tax, and a royalty on petroleum produced
in Australia.(3) But most attention is focused on the excises
on unleaded and leaded petrol and the Goods and Services Tax (GST) because
they affect pump prices.(4) The excises are indexed to movements
in the consumer price index (CPI) twice a year. Petrol excise is estimated
to generate $7.3 billion in 2000-01.(5)
A common misconception is that the Federal Government spends the GST
revenue. While it is true that the Federal Government collects the GST,
all GST revenue is passed to the States.(6)
Tax reform
To offset the effect of the GST on petrol prices, the Government announced
on 22 June 2000 that it would reduce excise by around 6.7 cents per litre.
The Government also claimed that tax reform would result in estimated
cost savings of 1.5 cents, bringing the total fall in prices to 8.2 cents.(7)
But the Australian Automobile Association (AAA) claims that, at best,
it will take five years for the refining industry to realise the savings,
and that savings will not be available to all petrol importers.(8)
This is evidence that, at current price levels, the reduction in excise
has not been enough to offset the GST. To that extent, consumers are worse
off.
There will be flow-on consequences from the interaction of the GST and
the indexation of excises. The GST will cause the price level and
the CPI to rise. The indexation of excises to the CPI will generate additional
tax revenue.(9) The indexation of excise will in turn increase
the base on which the GST is levied. But it should be noted that indexation
does not increase, but merely maintains, excise at the same level in real
terms.
The GST, being based on value, will generate revenue for the States as
petrol prices rise. But in this respect, petrol is no different from any
other good whose price has risen. And the revenue-raising effects of the
GST are no different from other value-based taxes, such as the former
wholesale sales tax. It is sometimes noted that the GST is a tax on a
tax. But the previous tax system also had the same feature.
Petrol prices have risen relative to the prices of other goods and services,
and there have been calls on the Government to cut excise or to halt indexation.
But to maintain the integrity of the Budget, the Government would have
to raise other taxes to offset the revenue loss or reduce outlays. For
example, a one cent reduction in excise would result in revenue forgone
of around $180 million. Moreover, it can be argued that consumers should
not be insulated from the relative price rise because that would delay
desirable adjustment, e.g. by driving less or buying more fuel-efficient
cars. The rise in the price of imported crude oil is, in effect, a redistribution
of income from Australia to foreign producers. Failure of consumers to
respond to the rise in the price of crude oil merely delays this adjustment.
Finally, it should be remembered that the rise in petrol prices is an
international phenomenon, and that petrol taxes in Australia are still
among the lowest in the world. For example, in 1999, only three of eleven
OECD countries had a lower proportion of taxes in regular unleaded petrol
prices.(10)
- See http://www.eia.doe.gov/emeu/international/crude1.html
- ACCC, 'Increase in the Average Retail Petrol Prices in Australia Compared
with the Rise in International Prices', 23 November 1999.
- For a brief description of the excise and resource rent tax, see Budget
Paper No. 1, 2000-01, pp. 5-12 and 5-14.
- From 1 July 2000, the excise rates are 37.481 cents per litre on unleaded
petrol and 39.725 cents on leaded petrol. GST is levied at 10 per cent
of the final price, which includes excise.
- Budget Paper No. 1, 2000-01, pp. 5-13.
- Net of administration costs.
- 'Petrol and Diesel Excise Reduction and Fuel Sales Grant Scheme'.
Joint press release by the Acting Treasurer and the Deputy Prime Minister,
22 June 2000.
- AAA, 'Petrol Prices to Rise as Result of the GST', Press release,
23 June 2000.
- The last increase in excise on unleaded petrol in August 2000 was
$0.006 cents per litre. The increase due in February 2001 may be in
the order of $0.02.
- International Energy Agency, 'Energy Prices and Taxes', quarterly
statistics, fourth quarter 1999.
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