Question’s in the title……
I’m no economist but I’m sure most of the cost of fuel is Fuel Duty (tax)….. so even though capping the price of fuel would mean governments making less money off fuel-duty, wouldn’t they make this back in VAT on other goods as consumer spending increases? (Because consumers have more money in their pocket?)
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Price rises usually because demand is rising when compared to the supply and vice versa.
If you just capped the price, and therefore demand remains more or less the same due to usage being the same. What would happen with the supply side?
Yes, and many governments control prices of basic goods like that. However in countries where markets don’t like to be regulated, this would be a political suicide and would prevent oil companies from raking in all that sweet sweet profit
They’ve done this in Australia, taking off a tax we pay. So it’s still expensive, but not horrifyingly so.
Petrol prices are around $2AUD/Litre, +$1.44USD /L right now.
Sorry, don’t know your country and what measurement is used for petrol 🙂
Outside of taxation governments don’t directly impact fuel prices. They do.. can.. but its more complicated.
The cost of a gallon or litre of gas is set largely by one thing only. What the petro companies want it to be. And there’s no arbitrage advantage, the price of a gallon at one pump is set to closely match that at the pump across the street because of various economic game theories like Hotelling’s law. Nope, they set the price of a gallon of gas NOW to cover the costs of oil they’re buying for next year.
See, because of the delays in extraction, pipeline/tanker shipments and refining, the oil you pump into your tank today was bought in a futures contract six months to a year ago**. So right now, the petro companies are buying oil for next year. But because of the whole Russia Ukraine thing, and the future demands of the same limited supply of non-Russian oil are static, yet supply will now be limited, the price of oil is scooting upwards.
Yeah, in an ideal world, the cost of a gallon of gas would correlate to the price of oil that was paid to produce that gallon of gas, but that’s silly, why would any company do that when they have a perfectly rational excuse to jack the price NOW? Note how as soon as ANYTHING comes up that even threatens future oil supply (therefore prices), gas at the pumps skyrockets… but when the future supply picture looks rosy, it takes months to years for pump prices to fall. Because they can do that and there ain’t much – short of reducing your own consumption – you can do about it.
Back to governments. Yes, setting or easing consumption taxes (or related carbon prices and fees) can affect the cost at the pump but that’s not the majority of the cost of a gallon. If we take roughly 30-40% as a fixed cost of transport and refining, another 40% is pretty much the cost of crude oil. So where governments really have an impact is how they affect the price of crude oil – piss off and oil exporting country: $oil goes up. Large oil producer invades another country and everyone else drops embargos on them? $oil goes up. Supply can be increased, but it requires drilling more wells, reopening refineries and pipelines and terminals that were mothballed, or worse building new ones, which takes $oodles and time and workers.
** if you’ve watched Trading Places and wondered how that works, its as literal as it sounds. If you buy six thousand tons of frozen orange juice futures after too many Manhattans one night at the club, you’re gonna get a call from a freight broker in a few months asking where you want six thousand tons of frojo dropped off. I can’t find the link but I recall there was one instance where an oil trader who bodged the numbers and didn’t trade/sell away their entire holding; phone rings and there’s a barge captain asking how or where he wanted the remaining few hundred thousand barrels of oil given his street address was a few blocks from the harbor.
I think e.g. Belgium does as well cap the prices. In germany though I paid 102 € for a full tank yesterday…
I have 100 lemons. I’m selling them for 1 dollar.
Now, let’s say it costs 1 dollar to harvest a lemon. If I can’t sell lemons for more than a dollar, I’m just going to stop harvesting lemons. That will mean that even less people will get lemons.
If I can raise prices, I have a reason to harvest even more lemons. Even if my price of harvesting lemons goes up, I will still harvest lemons because people need them and I can make a bunch of money by selling them.
Point being that price caps often lead to scarcity when people realize it’s pointless to produce the product. It’s happened many times throughout history.
Oil companies are understandably wary about increasing production quickly, because they just experienced what happens when you overproduce oil. They literally had to pay people to take their oil in the early pandemic. Why would they scale up production if the profit they make is limited, but the amount they can lose isn’t limited?
First get to the facts. You’re wrong – fuel taxes aren’t a big contributor to gas price. It ranges from around $0.20 to $0.50 per gallon. (Highest is California). To break down gas prices, roughly 60% of the cost is based on crude oil price. Another 10-15% is refinery costs and the remaining transportation (and taxes).
So there is no reasonable way to reduce gas prices without subsidies of a sort. Capping gas prices will simply lead refiners and gas stations etc to stop selling and making fuel. No logical company would purchase raw materials for $0.60, add $0.30 in processing costs and sell the product for $0.50.
Either consumers pay for it directly, have the government (ie taxpayers) pay for some of it indirectly or not have gas at all.
EDIT: Assuming you live in the USA.
Price controls like that historically haven’t worked very well.
If people can’t sell their products at the prices they want, they might always decide to not sell them at all, produce less of it, try to hoard it, refuse to sell publicly and only on a black market where they can charge what they want, reduce the quality of their product, use it to make something or turn it into something else to sell at whatever price you want or simply export it to sell it elsewhere.
Right now the oil industry is making record profits so even if you limit them to how much they can make they will still make a profit. they can threaten to stop selling gas but they won’t because a little bit of profit is better than none.
You also can’t store gas a whole lot. There is only limited storage and the refined product will go bad if you store it for too long.
You can’t easily and quickly reduce production either. (this is why we had negative oil futures that one time)
So gasoline is actually one of the few products where you could in theory mandate a price cap and have it work.
In practice the people who stand to profit have too much power to allow something like this to happen though.
Price controls usually result in the commodity becoming more scarce. As inflation increased the producers’ costs, they’d see less and less profit. At some point it doesn’t make sense for them to continue running at full production because that’s more loss.
The goverment could cap the cost of petrol but it is a horrible, horrible idea. Prices are a signal for scarcity, and blocking the signal will only exacerbate the problem in the long run. It is a far better idea for the government to support other solutions to reduce the need for petrol consumption.
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