Gasoline and diesel pump prices are hitting new highs worldwide. Gasoline prices in the US surpassed $4 a gallon for the first time in all 50 states last week, and the driving season hasn’t started yet. The national average price of gasoline and diesel fuel is higher than the previous highs set during the 2008 oil price surge.
In the UK, front yard prices are setting new unwelcome records, despite a 5p per liter fuel tax cut that took effect at the end of March. That should be interpreted as a price drop of 6p as the 20% VAT is levied in addition to the fuel tax. However, any benefit was short-lived. Underlying supply and demand pressures have already driven the prices of both fuels above pre-cut levels.
The problem is that fuel stockpiles are at their lowest levels in years. Inventories of intermediate distillates, including diesel, heating oil and jet fuel, were at their lowest in more than 12 years as of the end of March in the OECD. On the east coast of the United States, inventories of the same fuel have fallen to levels never seen before in data dating back to 1990. Gasoline inventories in the same region fell to their lowest level since 2014.
If the government needs more evidence that transportation fuel supplies are tight, it should look at the difference between the immediate and future prices of fuel. The road fuel market’s backwardation (immediate price exceeding future delivery prices, indicating an immediate supply shortage) is greater than it was in 2008, when crude oil reached $150 a barrel.
Rather than recognizing that fuel demand needs to be reduced, governments around the world are doing what they can to support electricity demand, including cutting taxes, maintaining subsidies, or scolding retailers for claiming that they haven’t fully passed tax cuts. doing everything. Bills are being debated in Washington that would make it illegal to sell consumer fuels at “unconscionably excessive” and exploitative prices. Meanwhile, in London, UK Business Minister Kwasi Kwarteng has urged fuel retailers to give drivers a “fair deal” and warned that competition and market authorities are now involved in the matter.
Although popular, lowering fuel prices only makes the situation worse as demand for transportation fuel increases during Northern Hemisphere summers. And the pain is not limited to road transport. Airlines could bring back fuel surcharges in the coming months. In fact, Portuguese airline TAP already plans to raise it, noting that “in the short term, travel prices will inevitably increase.”
Reducing taxes on fuel pumps, as done by the UK government and other countries, can provide drivers with very small temporary relief. However, by making fuel cheaper, demand is stimulated relative to what it would otherwise be. This simply puts more pressure on the already creaky supply chain, driving up pre-tax prices and quickly eliminating the benefits of cuts.
It’s painful and unpopular, but the government has to make the market work. People in need, whether transporters or less wealthy, should be specifically targeted.
Fuel prices will continue to rise unless demand is destroyed to meet the available supply. Lowering pump prices through tax cuts simply prolongs the pain.
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This column does not necessarily reflect the views of the editorial board or Bloomberg LP or its owners.
Julian Lee is an oil strategist at Bloomberg First Word. Previously, he was a Senior Analyst at the Center for Global Energy Studies.
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