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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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.
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