THE developed world protests loudly that high oil prices will seriously damage growth in the globalized economy. The warnings conclude by demanding that OPEC and other producing countries boost their oil output. However, as Custodian of the Two Holy Mosques King Abdullah made clear Wednesday, this is not a correct analysis of the problem.
The stability of oil prices in the current volatile market is not solely dependent on the supply of crude. Governments in consumer countries, especially Europe, have the power themselves to ease the economic burden, by reducing high fuel duties. In the UK, fully 75 percent of the cost of a gallon of fuel is tax which goes straight to the treasury.
If there is genuine concern about the impact markedly higher fuel prices are having on economic performance, the solution is simple: Governments should cut the tax. They will not actually be losing money. On the face of it, absorbing increases in the untaxed price by passing up the increased taxation is a win-win situation. Governments are not only protecting economic health, but in the long run they are also protecting their wider revenues, since an economy in decline is an economy that will yield up less tax. Downturn also boosts the demands on the public purse through the larger sums of unemployment pay that must be handed out to workers who have lost their jobs.
There is an argument that finance ministries in Europe could go even further in reducing their fuel duties. If they cut deeply into at-the-pump taxes, so positively reducing the price, rather than merely pegging them at current high levels, the economic stimulus could prove dramatic. This would be especially true for continental Europe where growth remains stubbornly sluggish. A constant factor in the vigorous performance of the United States has been the low price of fuel relative to the rest of the developed world. Even though US consumers are currently suffering, America’s competitive advantage is not being undermined, since pro rata increases are being experienced among rival trading nations.
The one cogent case that could be made against reductions in fuel taxes is that they are also being used as a tool to cut down on pollution from fossil fuels. However, there is clearly a balance here. A short-term sacrifice of discouragingly high fuel prices could preserve economic prosperity and so allow the investment in the research and technology necessary to slash the emission of greenhouse gases.
The hard truth is that European governments are afraid of imposing more direct taxation on their citizens, so they continue to expand their income from indirect taxation. Politicians in the eurozone faced with budget deficits and borrowing already in excess of that permitted under the Euro Stability Pact, can either risk electoral wrath by lopping expenditure or use stealth taxes such as fuel duties to fund their overspending. In such circumstances, demanding oil producers boost production is effectively asking them to underwrite the cost of their own failings.
