From the October/November issue of CEI UpDate
High motor fuel prices are now a major issue, both in America and Europe. It started in the US when early summer gas prices topped $2.00 per gallon in parts of the Midwest, sparking a wave of Congressional hearings and political finger-pointing. The cost per gallon throughout the rest of the country has also increased, making it a concern for all American motorists and an issue that likely played some part in the recent elections. But the US reaction has been tame compared to that in Western Europe, where France, Britain, Germany, Italy, Belgium, Denmark, Norway, Poland, Spain, and the Netherlands have been hit by protests over prices exceeding $3.00 per gallon. 2000 may be remembered as the year of the first global gas crunch since the 1970s, and the situation could get worse in the years ahead.
The wave of European protests has surprised almost everyone. Hard-hit independent truckers and farmers have taken to the streets, and with a surprising degree of public sympathy they have successfully interfered with the distribution of gas and diesel fuel supplies.
Tighter OPEC production limits and higher global demand have sent oil prices from under $15 per barrel for most of 1998 and 1999 to $35 per barrel today. The oil price rise alone is responsible for a 48 cents-per-gallon increase in gasoline, according to a recent study by the Congressional Research Service.
But in Europe, the OPEC-induced increases have merely been the proverbial last straw, while taxes have produced most of the burden. British fuel taxes are the highest, comprising 80 percent of the pump price of well over $4.00 per gallon, while the tax bite in Germany, France, and several other Western European countries is only slightly lower. In the US, taxes account for less than 40 percent of the price (18.4 cents per gallon federal taxes and 20 to 40 cents state and local), making gasoline a heavily taxed commodity by American standards but a bargain compared to the other side of the Atlantic.
Thus far, Britain’s Tony Blair is holding firm on taxes, but France has already promised tax relief in order to end the unrest, a move that served to encourage protesters in other countries.
In addition to being an easy source of revenue (at least until now), high European fuel taxes are supported by governments that have bought into the argument that fossil fuel use must be curbed to protect the environment. But, as the The Economist recently conceded, “Perhaps those who argued for ever higher fuel taxes on environmental grounds, including this newspaper, were too blithe about the effects on motorists and industry.”
In the US, environmental concerns have also played a role in rising gas prices. Indeed, the reason gas spiked above $2.00 per gallon in Chicago and Milwaukee was an Environmental Protection Agency rule taking effect on June 1st. The rule, which tightened restrictions on so-called reformulated gasoline mandated under the Clean Air Act, proved especially troublesome in these two Midwestern cities. According to the Congressional Research Service report, the new requirements added 25 to 34 cents per gallon in Chicago and Milwaukee, until the initial problems were fixed and prices came down to the national average of $1.50 to $1.60.
EPA has several new fuel regulations in the works, each capable of adding several more cents per gallon.
But the biggest potential regulatory impact on gasoline prices is yet to come, in the form of the 1997 Kyoto Protocol, the treaty to restrict emissions of carbon dioxide and other so-called greenhouse gases believed to contribute to global warming. According to econometric forecasts from Charles River Associates, complying with the Kyoto Protocol would require, among other things, a 50 cents per gallon increase in the price of motor fuels. Furthermore, despite the fact that the costly treaty has not even been ratified in the US or most other developed nations, many environmental activists are already grumbling that it does not go far enough to combat the threat of global warming. If the extremists get their way (always a possibility on environmental issues) we could see a run up in fuel prices far greater than anything that is causing the current protests.
Environmental bureaucrats massed in the Hague at the end of November to discuss the next steps towards ratification of the Kyoto Protocol. Ironically, the host city is one of many that have endured fuel protests. As we went to press, reports were filtering back that the global warming talks had broken down. It seems the memory of a public angry over artificially high gasoline prices and the governments responsible for them had not fully faded.