Pump it up, figure it out


Alternative fuels and cutting excises are touted as short-term solutions to ever-rising petrol prices, writes Joseph Kerr
MOTORISTS don't tend to ponder the future of the country as they stand at the petrol pump filling their cars.
But their thoughts as they empty their wallets to pay for an increasingly expensive tank of petrol are of intense interest to policy makers.
Australians are living with petrol prices that are now so high - projected to spike above $1.50 in coming days - they are pushing up interest rates. The Government is desperate to do what it can to deflect public anger, grabbing on to alternative fuels as a possible panacea ahead of the next election.
But there are increasingly loud calls for the Government to take a more radical step of cutting petrol taxes to give motorists some relief, or to conduct a real investigation into claims of profiteering in petrol prices.
It is doggedly resisting those calls, with the Prime Minister hoping prices will fall on their own and the Treasurer calling the present period the world's third great oil shock.
But with oil prices looking like they will be hitting new record highs for years to come and some predicting the end of the petrol age, there is a growing realisation that any solution might be expensive indeed.
According to Access Economics' Chris Richardson, Australians are living with petrol prices at the $1.45-a-litre level because of a surge in global demand for the fuel after three years of the best growth in a generation.
While global growth used to be typically about 3 per cent a year and demand for oil increased about 1 per cent annually, recent years have been marked by global growth of 4 to 5 per cent. Demand for oil has also risen 2 to 3 per cent annually.
As in everything, China is a key part of the equation, Richardson says, with its ever-expanding, energy-hungry economy increasingly drawing on oil for power generation.
As well, global supply of oil is not as strong as it could be, he says. When oil prices were low, there wasn't enough investment in recovering new oil sources as there should have been, and lacklustre spending on maintenance made it harder to lift supply when demand rose.
"God put oil in all the trouble-prone parts of the world," Richardson says.
The supply-demand equation is now so tight, small changes are provoking sharp price changes at the bowser.
The Government insists it can do little, with John Howard saying "the era of very low oil prices or petrol prices is behind us".
The best he could offer was a hope "that we're not in an era of ever-rising petrol prices, and perhaps somewhere in between where that settles, $1.15, $1.20, there's some hope of that but, once again, in the medium term".
Richardson doesn't think demand or prices will fall much. An Access survey of economic forecasters found the consensus that prices would fall from the $US70 ($91.50) per barrel mark to $US63.70 by the end of the year, then to $US58.90 by the end of 2007 and to around $US55.50 by end 2008, he says.
Over the longer term, he expects prices to remain just as volatile, pointing to the possibility of a fourth or fifth oil shock in coming years. "If the broad trend is up it's not going to be fun along the way," he says.
In recent months much of the debate has focused on possible alternative fuels such as ethanol, which are touted as offering the chance for the world to become less reliant on unstable Middle East oil.
Some commentators, led by Nationals rebel Barnaby Joyce, have pushed for the use of ethanol-blended fuels to be lifted in hopes of bringing down prices.
As ethanol is exempt from the 38c-a-litre fuel excise, a 10 per cent petrol-ethanol blend should be about 4c per litre cheaper.
The US and Brazil are the giants of ethanol production, each pumping out more than 19 billion litres in 2005, compared with 150 million litres from Australia. In the US, the industry has boomed since George W. Bush became President, with 21 new plants beginning production in three years.
Renewable Fuels Australia, the local ethanol lobby group, promotes it as cleaner than fossil fuels, as it is made from plant matter such as grains or sugar.
But there are limits to what ethanol can do, with most cars needing modification to run entirely on ethanol. Most new and many older vehicle models can run on ethanol-blended petrol, according to the Federal Chamber of Automotive Industries. The chamber keeps a register on its website of the models for which ethanol is not recommended. In some cars made before 1986, ethanol can affect fuel lines, while its use in fuel-injected engines can lead to early part deterioration, in some cases prompting weak acceleration.
Barney Foran, a visiting fellow in the Centre for Resource and Environmental Studies at the Australian National University, says ethanol and biodiesel are good as transitional fuels because they get us used to the idea of a fuel cycle that isn't entirely based on petroleum products.
But in Australia they are limited by the sheer amount of productive land that is available for the agricultural products needed to make them, such as wheat and sugar.
Liquefied petroleum gas has also been put forward as a part of the solution, with Coalition MPs this week asking Howard to consider a $1000 subsidy for motorists wanting to convert their petrol vehicles.
LPG Australia says the annual production of about 3300 kilotonnes mainly comes from deposits in Bass Strait and the North West Shelf. Two-thirds of national LPG goes into more than 500,000 Australian cars.
Foran says LPG is a good fuel, but because it is a by-product of oil production it has a limited future once supply of readily accessible oil dries up. "A far more promising fuel is compressed natural gas, particularly as a key transitional fuel for the next 20 years."
If the Government mandated that cars produced for Australia had to be compatible with CNG as well as petrol and diesel, "we would have some resilience over the next 20 years". Foran says hydrogen, another fuel touted as a possible salvation, is very difficult to move around and the technology isn't available yet to solve this. In the meantime, another very good transitional fuel could be methanol, which is produced from natural gas, coal, or wood.
A politically more difficult choice is to look at cutting the tax on petrol - a campaign spearheaded in recent months by Family First Senator Steve Fielding, who has been calling for a 10c-a-litre reduction in the tax - a move that could cost the Government $3billion.
David Trebeck, former head of the Government's 2002 fuel tax inquiry, has called for the termination of all fuel taxes. He dismisses alternative fuels on both environmental and economic grounds, arguing the environmental benefits are being overplayed and the subsidies for ethanol underplayed. "This alternative fuel stuff is still pretty much nonsense, either in its environmental credibility or its intrinsic economics," he says.
The only price advantage coming from fuels such as ethanol blends are that they are exempted from excises and therefore effectively being subsidised by government.
"If they had the excise they should, we wouldn't be having this discussion," he says. "The pricing arguments are based on a non-level playing field."
Trebeck says the fuel tax inquiry had shown the real and sole purpose of fuel excise is revenue raising. "It's not for repairing roads or funding the cost of road accidents," he says. "It's not for congestion, pollution (or) other environmental reasons. It's for raising revenue, full stop. Moreover, there's nothing about it being a tax on bad habits."
But it is flawed even as a revenue-raising device, he says, particularly since the Government bowed to political pressure over high petrol prices in 2001 and scrapped indexation of petrol taxes. As a result, fuel tax is becoming a smaller and smaller proportion of total taxation revenue.
"The time has come to abolish them," he says, and increasing the GST rate by 3 to 4 per cent could make up for the lost revenue.
But Richardson is sharply critical of calls in recent days to cut petrol taxes to cushion motorists from higher prices. "Should governments take the pain off the punters at the petrol pump or should we let the evils of the market do what they want?" he asks. "I really wish we would let the market have its evil way."
Richardson attacks the Government's decision to scrap indexation of the petrol tax as a "stunningly bad example of policy". "The worst possible thing we could be doing is heading even further backward.
"It would be sick and wrong to be dropping petrol taxes. We have the fourth lowest petrol taxation in the rich world. Because it's a scarce, disappearing resource, a polluting resource, we should tax this more than we tax the ordinary good."
He suggests political pressure around the world is heading in the wrong direction. "If we want to prepare for our future then we have to let prices rise," he says. "That way every bloke in his garage will be helping us get to the future we want rather than the ugly one if we hide from these prices."
A more immediate concern about that plan is whether a 10 per cent cut would wind up in the pockets of the petrol companies, with widespread concerns they are profiteering.
This allegation has gained weight due to the higher margins won by refiners in recent years - with the so-called "refiner margin" jumping to nearly $US10 a barrel in the last quarter, more than double a few years ago - although the Australian Competition and Consumer Commission doesn't give it much weight.
Labor has been calling for the ACCC, which monitors the prices charged at thousands of petrol stations through its website, to be allowed to conduct probes into prices through the production process.
The commission can only conduct a formal probe if it receives a formal reference from government. At the moment the ACCC does little more than monitor prices around the country, although a 2001 West Australian rule forces retailers to fix their prices for 24 hours and keep that state's consumer department informed.
But while refiners are now making better profits, Richardson does not think any tax cut at the bowser would disappear into petrol industry profits because the market is so competitive.
"Competition is still sufficiently strong that a 10c cut in taxes would show up as a 10c cut at the bowser," he says.
But such a move would be a mistake for Australia, particularly in its revenue mix. "We already have too little reliance on taxes on spending and too heavy a reliance on tax on income," Richardson says. "It would be a clear step in the wrong direction."
As Trebeck acknowledges, "these are dog days, particularly for politicians in marginal seats. But it's also a time for cool heads and not knee-jerk reactions".
Joseph Kerr is a business and political writer for The Australian.