A Word on Inflation — A Look at Irish Fuel Prices
Inflation is the big word so far into 2022. I’ve been keeping tabs on it which you can see here on the awl Twitter and if you want give it a follow. Anyways, let’s use the pricing of oil as the crux of this thought exercise to gauge how best to combat the rise in prices, even if it is just going to focus on fuel in this quick article.
From an economic perspective, the pricing mechanics school of thought and interventionalist policy implementation from government will be the main constituents of this piece.
Pricing of Fuel
Around the time of writing, the price of a barrel of oil is trading at $88.15. That means the whole process of extraction, labour, processing, holding, transport, and the economies of scale for oil is costed into this price of $88.15 for a barrel. To convert this to euro is €77.09 per barrel.
Now how much does a barrel hold? Without being pedantic and loving nice round numbers, it holds 159 liters. That is 159 liters of oil for €77.09. That means that for 1 liter of oil is costing about €0.48.
With this in mind, I’ll use the cost of the a pump that gives the best price closest to me and which is along my route to work. The cost at the petrol pump is 171.8 meaning it’s just shy of €1.72 per liter, but I love round numbers so let’s say it’s €1.72 on the button. If the cost of a liter of fuel is €0.48 and the petrol pump is €1.72, that means there is a difference of €1.24. This means that the additional tax percentage on the price of fuel per liter accounts for 72% of the price of fuel. If we add in the service station mark up on the fuel for profit, it will be about 3cents on the liter. which will be incorporated into the additional cost added to the cost price of fuel.
So let’s format this to make it nice and easy to read;
- Cost Price/Liter = €0.48 (28%)
- Tax and Additional Cost/Liter = €1.24 (72%)
- Price at Pump/Liter = €1.72 (100%)
Let’s break the tax down to see what makes up the tax portion of the fuel price;
- VAT 23% of €1.24 = €0.29
- NORA Flat Rate of €1.24 = €0.02 which is 1.6%
- Excise/Carbon of €1.24 = €0.90 which is 73%
- Additional cost for Service Station profit of €1.24 estimated at 2.5% = €0.03
Finally, if we take a look at the pump price break down for everything, we will see the make up of the price of fuel at €1.72;
- Cost price of fuel being €0.48 = 28%
- VAT being €0.29 = 17%
- NORA Flat rate of €0.02 = 1%
- Excise and Carbon being €0.90 = 52%
- Service Station Profit being €0.03 = 2%
A Fix to the Problem — Using Interventionalist Policy Differently
To not give to much attention to this craziness and the inelasticity of the product that allows for such economical theoretical increases without a robust effect on demand, the topic of conversation regarding fuel price inflation needs to look at the “government interventionalist policy regarding fuel”, otherwise known as fuel tax.
The increase in excise and carbon tax on fuel has been a massive factor in inflation, which has knock on effects into many industries that use oil/fuel to make products from food to fertiliser, and travel to heating. The basic standards of living are being destroyed as people now go hungry, cold, isolated, and even can lose jobs as bottom lines will dictate job cuts due to the rising cost of inputs to be processed into end products.
Such policy that is being brute forced through is highlighting that the hearts are in the right place with regards to environmentalism, and I’m sure everyone wants to put as big a stop to climate change as they possibly can, but when you make €100,000/year as a TD or €70,000/year as a senator (not including allowances or expenses), it’s very easy to tell the rest of the population to tighten the belt as it does not nearly affect them as much as it would affect those in reality. It is especially disassociated from reality when the majority of these legislators are based in a capital city with amazing public transport infrastructure when compared to the rest of the country.
Staying with policy and as with any sort of policy, it is up to government to dictate how it should be implemented to help with the current economic climate. Considering the vast majority of the price of fuel is found in three different types of tax, it would make sense to do the following to combat soaring fuels prices, make voters happy, and put more money back in the pockets of the people without resorting to politically perceived positive PR in the form of “once off payments” that are not means tested, available to everyone, and only hit the tax payer. This is only focusing on fuel but the sentiment and situation of other areas of Irish life can pull from this thought exercise is the square peg meets the square hole so to speak.
Cut VAT and Excise/Carbon (Immediate) — With the respective taxes making up collectively 69% of the cost of fuel, the cutting of VAT on fuel in this specific case should bring it back down to 21% meaning a drop in VAT from €0.29 to €0.26. The loss of 2% of VAT on the liter will see petrol at the Tesco pump by myself drop from €1.72 to €1.69. The temporary cut of the Excise/Carbon from 52% to 42% will see the drop of €0.90 to €0.72. That decrease of €0.18 will see the price pump drop from €1.69 to €1.51. Compared to the €1.72/liter we are seeing now, the drop of 13% in price putting more money back in the pocket of the consumer and production facilities in many industries within Ireland.
Get Rid of Road Tax (Immediate) — For most private vehicles, road tax is another route in which to gut the populous. The road tax should be incorporated into the use of cars while also being able to net all those who are evading paying their road tax. The best way to do this is to incorporate road tax into the consumption of fuel. The less you use the car, the less fuel you put into it, and the less car tax you pay. On the opposite side, the more miles you rack up, the more fuel you use, and the more you pay on road tax.
So as we have arrived from VAT and Excise/Carbon tax cuts at the pump price of €1.51/liter, if we take a commuter who drives a 1.4L petrol car to and from work every week (assuming a 5 day work week) that clocks up 1000Km and charge €0.03 on every Km, then every week €30 will be spent on road tax. So the new €1.51 will be pushed up to €1.54. If a person works 40 out of 52 weeks of the year, the road tax collected will be €1,200.
That same person in the same car drives 5 days a week but their job is 10Km away, which means their journey is 100Km a week and at €0.03 every Km will pay €3 a week on road tax. The same 40 weeks are worked in a calendar year seeing them pay €120 in road tax.
Broaden the NCT Net (Immediate) — If you get a service with a licensed garage, you get a renewed NCT cert no matter if in date. There should be a lighting system for cars and NCT garages/centers will recommend fixes (green/yellow), carry out the fixes (orange), and if a vehicle is not road worthy and a danger to the driver/other road users (red) will have to be impounded. A road tax bracket will have to introduced as those who are always on the road and paying the higher price of road tax will need to have a system in place were the fixes done at the NCT garage/center will come out of the collection fund. Each car will be registered through the NCT communications infrastructure to determine eligibility.
Better Budgeting and Infrastructural Investment (Medium to Long Term) — It is long past due that proper investment is to be undertaken when it comes to Irish transport services and energy infrastructure like wind/tidal/solar/biofuel/hydrogen/nuclear/electric. By capturing all road users within a tax bracket based on road usage, the projects to develop better roads that are eco/wildlife friendly (under road tunnels for animals to use, and two way side road cycle lanes), expanding the train and bus network for pedestrian and freight delivery, promoting better vehicle upkeep through improved NCT services, and future proofing improvements to transport network to minimise unnecessary wear and tear on vehicles, having more road freight tacho stop areas, and nationwide integrated green vehicle charge points or greenways, the proper use of tax when it comes to fuel prices must be seriously looked at.
Everything said in the above paragraphs is done with the thought of inflation coming to mind. To make it easy and specific when reading, the price of fuel was only looked at, especially fuel at the pump.
It seems like the time is now to use taxation policy in a positive way and to utilise intervention constructively at the benefit of the citizenry. By putting more money back in the pockets of people, it will allow them to spend more, save more, or invest more. Giving those that need it actual room to breath. It will also make sure that the laisses-faire attitude of spending the tax payers money is taken more seriously and said tax payer get more bang for their euro.
Not doing this and continuing down the same road of inaction, and seeing and allowing inflation to cripple the people. If inaction is taken, we face into the value of a euro today being worth 85c by end of year. We must also remember that the decision made are being done by those who earn €100,000/year so what is a massive disrupter to our lives, is merely an inconvenience to theirs.
Jonathan McEvoy is an Irish based border control post inspector for the Irish Government and Europe Union who took up his role in 2019 in response to British withdrawal of trade agreements, which was a position taken up after time spent working within the financial services sector in Dubai. He is an economics and finance postgraduate from Waterford Institute of Technology and a community stalwart in his home city of Waterford having been elected to serve on many boards of directors around the city in a voluntary capacity. His love of writing has a deep theme of economics in every published article which talk about history, philosophy, finance, politics, and society. His writings are grounded in practical observations away from the theoretical hypothesis of hypothetical potentials. If you are looking for a modern digestible viewpoint on modern economic ideas with a focus practicality and no holding back, he is a writer for you.
Find Jonathan on the social platforms @jonathanmcev0y
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