Page last updated at 01:10 GMT, Thursday, 12 June 2008 02:10 UK

High fuel prices: good or bad?

By Roger Harrabin
BBC environment analyst

British truck driver protesting
Truckers feel cheated, yet they could gain in the end

It clearly harms the global economy when oil prices get too high, but the definition of "too high" rather depends on where you are sitting, or more specifically, what vehicle you are driving.

A secondary question is what level of fuel tax is too high. And here again the answer depends.

To read some of the papers, for instance, you'd think all hauliers are suffering from high prices, but that's not so. You won't see the haulage giant Eddie Stobart on the fuel demonstrations. He forecasts a fat year, despite the oil price.

Eddie Stobart, like the other large truckers, has a fuel price recovery clause embedded in its contracts - if the diesel price goes up the company passes it straight on to his customers.

It's the small and medium-sized firms that are suffering. In this brutally competitive sector, with over-supply of haulers, few operators are able to negotiate the luxury of price recovery clauses.

The small truckers have to pick up the tab at the fuel pumps themselves.

Beneficial price hikes

Industry analysts say there are simply too many small truckers competing for too little business.

Graph showing the percentage of hauliers able to recover fuel costs

It's a bit like the fishermen who are also complaining about the diesel price, and who are competing for a diminishing number of fish.

The Spanish government has recognised the problem by considering paying some small hauliers to go out of business.

But in fact, we could speculate that so long as hauliers can pass on the cost of the fuel prices rises, there may be a hypothetical temporary benefit to truckers from a rise in fuel prices.

This theory hasn't been tested but it would make sense that truckers would gain if high petrol prices forced some car drivers off the road.

That would create more space on congested roads and lead to more reliable deliveries. Uncertainty over deliveries is a key factor in the profitability of haulage.

The notional benefit would end, of course, when higher oil prices began to erode demand for goods, and so for freight.

Price buffer

Some economists advance another theory - that high fuel taxes might be good for the economy overall.

Many motorists are struggling with fuel prices at their current peak, but the UK has not been afflicted by the same driver anguish as the USA.

If you compare the graphs of prices at the pumps in both countries, America's has sharp lines and points, Britain's oil price fluctuates in rather less aggressive curves.

And that's because the UK's price moves are buffered by high fuel tax.

Here's how.

Say for sake of illustration that the price of a gallon of petrol in Highfueltaxland is 25p and the tax on a gallon is 1. That makes petrol at the pumps 1.25.

Now say the price of petrol doubles to 50p. The driver at the pump in Hightaxland pays 1.50 - an increase of 20%.

The opposite extreme is Zerotaxland. There when the cost of oil doubles from 25p pence to 50p, the cost as the pump doubles too - sending a shock through the economy.

It hurts all the more because the Zerotaxland motorist hasn't budgeted for high fuel costs.

In many countries in Asia, where fuel has been heavily subsidies, this argument is even more pertinent.

In Subsidyland the price hikes have been even greater in percentage terms than in Zerotaxland - reflecting both the rise in oil prices and the removal of subsidies by governments that can no longer afford to maintain them.

Active tax regimes

This phenomenon has arguably helped Europe to weather oil price fluctuations better than the United States. That reduces the need to own a car - in towns at least.

And Europe has used some of the tax revenues to create a better public transport system then America's. That reduces the need to own a car in towns, at least.

A chancellor really wanting to shield the economy from jerks in the oil price might want to exaggerate the smoothing effect of taxation by creating a system to cut fuel tax levels at times of high oil price and raise them at times of low oil price.

Professor Alan McKinnon, an economist specialising in freight transport, goes further by suggesting that the government might cream off revenue from North Sea oil at a time of high prices and give it back to the motorist, whilst adjusting the other way when prices drop.

There is widespread cynicism about the Treasury's green tax agenda.

Any changes that would ease the current pain at the pumps would be likely to prove politically popular.

Graph charting the rise in diesel prices over the past three years




SEE ALSO
Last bid to avert tanker strikes
11 Jun 08 |  Business
Drivers warned against fuel panic
10 Jun 08 |  Business
Talks over Shell driver pay fail
05 Jun 08 |  Business
Rising prices boost Shell and BP
29 Apr 08 |  Business

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