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The UK’s Fail Price Stabiliser

November 16, 2011

This idea of a fuel price stabiliser in the UK has been knocking around for far too long now, despite some blindingly obvious flaws with it. It would be completely unaffordable in every way for the UK government, that much is clear: we can’t afford to lower fuel duty at all. We already have a budget deficit of 17% (for every £1 the UK government spend, they have to borrow 17p) and if we cut 10p of fuel duty it will increase by more than half a percent, £4.6 billion.* The most they could do would be to take a penny or two off, which the oil industry or the petrol retailers will eat back up in a heartbeat, and would have very little effect anyway.

I worked out how much it would cost me just in petrol to drive to work. I currently get the train with an £88 a month rail pass. Ignoring the other costs of running a car (insurance alone would cost me over £2000 a year as a young man who has yet to learn to drive), this would be a 24 mile journey each day for 260 working days a year, a total of 6240 miles. 40 miles to the UK gallon is 8.8 miles to the litre, so this means I would use 709 litres of petrol. Currently unleaded petrol costs £1.35 per litre, so the petrol would cost me £957 a year, or about £80 per month. So the only way a car would compete with my train pass (which also works for the whole city and surrounding areas) is if I can get the entire running costs of the car to less than £100 per year, insurance and all. No chance. Even if the government generously bankrupted itself to save me 5p on litre, that would only save me £35 a year.

My next issue is with some of the people calling for this reduction. I’m not going to demonise the road transport industry as this is clearly something important to them, so obviously they are pressing hard for this price stabiliser, but the government must ignore it. They have cut the subsidies to the booming solar industry for this very reason – they need help to be competitive. If road transport companies are worried that their business will be replaced by rail transport because it’s cheaper, then tough! Rail freight will be a much better option for the environment if we get on with upgrading and electrifying the railways, so all the better if it’s cheaper. Businesses seem to love the free market until they realise it’s about to screw them over, and suddenly they want subsidies and regulations to help them.

Finally, my biggest concern is that nobody is thinking through the consequences. If the government are guaranteeing to maintain the current price, what will stop the oil companies and petrol retailers pushing the price up? Raising their margins won’t lower the demand for their product if someone else will pay to keep the price the same, so what motives do they have? Concern for the British Treasury? Their own generosity? I don’t know about you, but I have my doubts.

Around ten years ago, there was a similar system put in place in California for electricity prices. The government didn’t subsidise prices, but put a cap on the retail price (the price us customers pay to the supplier) so it wouldn’t go any higher even if oil and electricity wholesale prices went up. The wholesale price was much lower than the retail price at the time, and there were lots of power stations about to be finished so they couldn’t see a reason the wholesale price would go up. This cap was put into place at the start of 2000, and for the first few months it worked as expected. Between April and December 2000, wholesale electricity prices went up by 800%, meaning that the suppliers were being forced to sell electricity to customers for much less than they had bought it from the power stations.

In January 2001 California declared a state of emergency, and eventually managed to stop the massive price spike, but only after blackouts affecting a few million people, one of the three electricity suppliers in the state going bankrupt, and another requiring massive state bailouts to remain afloat. They put a cap back onto the wholesale price, at three times as high as it had been the previous year, and let retail prices go up to allow suppliers to make profit again, and ten years later California still has electricity prices higher than almost every other state, 40% higher than the US average.

Some of you may know this as the Enron scandal, as they were instrumental in raising prices, but other electricity producers followed suit – artificially lowering supply to drive up demand. At no point during the blackouts was there a lack of generation: they had nearly double the amount of power stations needed to meet demand, but they switched them off because it was more profitable to drive up demand and leave people in the dark. Do we really want that to happen here with petrol prices? They might not be as fraudulent as Enron, but if they can shut down some refineries to save costs without losing any revenue, it’s a win-win situation for them. We, on the other hand, have to suffer with more cuts to lower our deficit, plus the redundancies from these closing refineries to add to our unemploymed, all for nothing when the government finally realise they can’t afford the stabiliser and petrol prices are allowed to rocket up again.

This is the conclusion I want people to understand: the stabiliser is very unlikely to do what it is supposed to, and will cost us a lot in the process. It might give us a short-term stem from rising petrol prices if we are lucky, but eventually it will have to be dropped and prices will catch up to where they should be if not more. The state of California had to pay $40-45 billion for their energy crisis, with the ultimate conclusion that prices were higher than they would have been without it. Could you imagine the uproar if David Cameron came to the media and said “Oops, we cost the taxpayer £25 billion for nothing. Sorry.” Oh wait, that’s already happened…

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* The budget deficit for 2011/12 is £121 billion according to the UK 2011 Budget in March. Fuel duty is expected to raise £26.9 billion in the same period at it’s current rate of 58p per litre, so around £0.46 billion per penny per litre.

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