Wednesday, December 19, 2007

In praise of high petrol prices: Why not higher electricity prices also?

Mr Rudd's foolish mutterings during the election campaign to manage petrol prices may come back to haunt him. He didn't say 'control' but he did suggest that something needed to be done about them - the impression was unmistakeable. Mr Rudd's concern was to win a few votes from disgruntled consumers but this message was both misleading and inappropriate. He cannot do anything about petrol prices and, anyway, should not try.

The ACCC have again reported that nothing can be done about these prices - they reflect international marginal costs. While the local wholesaling industry that imports most of the fuels we use is highly concentrated there is no evidence of significant collusion. Margins are around only 4 cents per litre and, compared to other countries, government taxes are relatively low.

In one respect the ACCC findings are unusual. The findings did identify the unique Australian weekly cycle in petrol prices with trough prices being experienced on Tuesdays and peak prices on Thursdays. The difference between peak and trough prices is often 10 cents per litre - it is a large range with the majors adding about 8.7 cents per litre to prices each Wednesday.

These price cycle differences are so regular and so long standing that one might suspect a measure of collusion is occurring. One wonders for example why enterprising service stations don't corner the market on Thursdays by selling at a discount and having a relaxed Tuesday by charging premium prices then. I don't know the reason this does not occur and nor does the ACCC - the issue is a mystery. But the ACCC is convinced they do not reflect wholesaler collusion.

Like every other motorist I grimace at my monthly petrol bills and try to fill up my tank each Tuesday. But these high prices are steering things in the right direction - even if, by themselves they are less than completely adequate. We do need to develop alternatives to petroleum-driven transport and these are being developed in response to higher prices. We also need to make practical steps in our everyday lives to reduce greenhouse gas emissions. The prospect of 'peak oil' and an efficiently functioning forward-looking liquid fuels market is helping net to address climate change issues - even though by raising costs it reduces resources available to address climate change. The same cannot be said of coal use in electricity generation where scarcity is not an issue and where carbon taxes must be introduced to cut associated greenhouse gas and other pollution externalities.

I have an aging vehicle that is a petrol-guzzling hunk of rubbish - when it expires I will replace it with a more fuel efficient vehicle partly because of the financial incentives that drive my behaviour. This is as it should be.

I should, in fact, be facing the same incentives to change my use of greenhouse gas emitting electric power. We should accept the need for higher energy prices and the case for a conservation ethos.


Iain Hall said...

I drive an EB Ford Fairmont that cost me a little over a grand (just gotta love ebay) and even though it is not the most fuel efficient machine, to replace it with something that is would cost say 30 grand now it will take a very long time to save the extra 29k so as lonng as your clunker keeps going just remember that you are saving money, even if you are spending more on fuel.

Anonymous said...


Why don't you tick the box demanding green energy on your next bill and put an end to your guilt?

hc said...

Anonymous, It isn't guilt I am suggesting we promote. A lot of people can learn to live with guilt. It is pricing resources at their full social marginal cost of delivery to create the right incentives.

Mike said...

It'd be handy if they'd do the same thing with water, too.

Anonymous said...

Well you could take the first step by buying gree mpwer, harry. Nothing to stop you.

Mike said...

I think Harry's point is that in a better world the prices at levels that make sure that for forms of consumption that affect everyone, everyone bears the that cost in some part, rather than relying on those with a social conscience to act with their wallets by buying green power (or carbon offsets, for example).

Doing so is certainly a start (I'm on green power myself) but it's not really an efficient system, and without the right incentives in place it can be much harder to change human behaviour.

Better policy could be constructed around more efficient pricing with perhaps benefits for those who are conscientious and careful in their consumption of power, thus rewarding those who take responsibility for their consumption.

Tiered water pricing is a small-scale example of this, though I doubt that either the prices or the differentials at present are enough to seriously impact behaviour.

Mike said...


" a better world the prices [would be] at levels..."

"...for forms of consumption that affect everyone, everyone bears the that cost..." - there shouldn't be a "that" in there.

Francis Xavier Holden said...

You'd have to drive to Sydney and back every week to let fuel consumption make any impact on the decision of which car to buy.

We do need some explanation of why there is the same 5% variation in fuel prices each week on the same days driven by the wholesalers. It can't be magic or God's mysterious intervention as the ACCC claim.

jpbenney said...


My ecological knowledge tell me that Australian species have exceptionally low energy requirements because of the extreme soil poverty. This leads me to think that Australian petrol and energy prices should be by far the least cheap in the world instead of some of the cheapest. The observation since 1997 of a forty percent decline in the normally reliable rainfall of Melbourne and its catchment areas suggests firmly to me Australia is the most sensitive place in the world to global warming - which further the argument that Australia should have the least cheap energy of any country int he world rather than some of the cheapest.

If you read a recent post, you will see that I think people should imagine the benefits of what I view as an ecologically fair petrol price for Australia - though it is and would be seen as astronomical compared to even the least cheap petrol today.