Tag: vehicle excise duty

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Driving down the miles

From early January to late February 2013, the average pump price of petrol in the UK rose by over 6p per litre – a rise of 4.7% in just seven weeks. There have also been substantial rises in the price of diesel.

The higher prices reflect a rise in the dollar wholesale price of oil and a depreciation in the pound. From 2 January to 21 February the pound fell from $1.63 to $1.53 – a depreciation of 6.1% (see). Crude oil prices (in dollars) rose by just under 7% over this period. With oil imports priced in dollars, a weaker pound pushes up the price of oil in the UK. The price has then been pushed up even higher by speculation, fuelled by the belief that prices have further to rise.

The higher price of road fuel, plus the general squeeze on living standards from the recession, with prices rising faster than wages, has caused a reduction in the consumption of road fuel. Petrol sales have fallen to their lowest level for 23 years. Sales in January 2013 were 99m litres down on the previous month’s sales of 1564m litres (a fall of 6.3%).

Not surprisingly motorists’ groups have called for a reduction in fuel taxes to ease the burden on motorists. They also argue that this will help to drive recovery in the economy by leaving people with more money in their pockets.

Equally not surprisingly, those concerned about the environment have welcomed the reduction in traffic, as have some motorists who like the quieter roads, allowing journey times to be cut, with resulting reductions in fuel consumption per mile.

The following videos and articles discuss the causes of the most recent fuel price rises and also examine the responsiveness of demand to these higher prices and to the reductions in real incomes.

Webcasts

Rising petrol prices are ‘forcing drivers off the road’ BBC News, Richard Westcott (22/2/13)
Fuel prices ‘forcing drivers off road’ – AA BBC News (22/2/13)
Fuel Prices Head For Highest Level Ever Sky News (22/2/13)
Commodities Next Week: Fuel Prices Hit Fresh 2013 Highs CNBC (22/2/13)
Ministers to blame for high fuel prices, says competition watchdog The Telegraph, Peter Dominiczak (30/1/13)

Articles

Petrol price surge adds 6.24p to a litre in a month The Guardian (22/2/13)
Petrol prices set for record highs as speculators and weak pound drive up pump costs again This is Money (22/2/13)
How are motorists saving fuel? NNC Magazine, Tom Geoghegan (9/3/11)

AA Report
Fuel Price Report (February 2013)

Data

Weekly road fuel prices Department of Energy and Climate Change
Energy consumption in the UK Department of Energy and Climate Change
Oil and oil products: section 3, Energy Trends Department of Energy and Climate Change
Europe Brent Spot Price FOB (Dollars per Barrel) US Energy Information Administration
Crude Oil (petroleum), Price index Monthly Price – Index Number Index Mundi

Questions

  1. Is it possible to calculate the price elasticity of demand for petrol from the data given? Try making the calculation.
  2. How important is the ceteris paribus (other things being equal) assumption when calculating the price elasticity of demand for petrol?
  3. Why is the long-run price elasticity of demand for road fuel likely to different from the short-run price elasticity?
  4. If wholesale oil prices go up by x%, will prices at the pumps go up by approximately x% or by more or less then x%? Similarly, if the pound depreciates by y% would you expect prices at the pumps go up by approximately y% or by more or less then y%? Explain.
  5. How has speculation affected fuel prices? Is this effect likely to persist? Explain.
  6. Under what circumstances would a reduction in road fuel taxes help to drive the recovery? Are such circumstances likely?
  7. Which groups in society suffer most from higher fuel prices? Is this reflected in their price elasticity of demand and if so why?
  8. Is a rise in fuel prices above inflation likely to increase or decrease inequality in living standards? Explain.
  9. Should externalities from fuel consumption and production be taken into account when setting the duty on petrol and diesel and, if so, what would be the implication for prices?
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Guzzling gas just got more expensive

One of the key Budget measures was a change in the car tax regime. The Chancellor, Alistair Darling, introduced a new banded system annual vehicle excise duty (VED) based on the level of emissions of the vehicle. The cars with the lowest levels of emissions will be exempt from VED, but at the other end of the spectrum, the highest polluting vehicles will face an annual VED of around £440. However, this will be substantially higher in the year of purchase of the vehicle and this so-called ‘showroom tax’ will raise the tax level to £950 in the first year of purchase.


Gas guzzlers hit with higher taxes Guardian (12/03/08)
New taxes on gas-guzzlers will raise an extra £1.2bn Guardian (13/03/08)
Spared at the pumps – but hit in the showroom Guardian (16/03/08)
Q&A: Showroom tax BBC News Online (12/03/08)
Gas guzzlers set to face £950 tax BBC News Online (12/03/08)

Questions

1. Explain how the highest polluting vehicles affect the socially optimal equilibrium in the market for car travel.
2. Using supply and demand diagrams as appropriate, illustrate the likely impact of the new car tax regime in 2009-10 on the equilibrium in the market for car travel. What is the significance of the concepts of price elasticity of demand and consumer surplus in your analysis?
3. Discuss the likely effectiveness of the new banded car tax regime at reducing the average level of emissions from cars. Would raising the tax on petrol and diesel be a more efficient method of achieving the same goal?