EU-wide fuel tax cut a recipe for trouble

From British truck drivers causing chaos in Central London to Spanish fishermen striking in and around Barcelona, skyrocketing oil prices have affected every part of European life.
Hundreds of British truck drivers converged on London in a convoy in a protest to demand government help over rising fuel prices. Ruling Labour Party lawmakers also put pressure on British Prime Minister Gordon Brown to rethink planned fuel and road tax increases.
However, Justin Urquhart Stewart, director of Seven Investment Management in London, told New Europe that although the protest may prompt ministers to rethink planned fuel tax increases, a decrease in fuel taxation is not going to happen. “The government doesn’t have the money and it goes against everything they are trying to achieve,” he said, adding that a fuel tax cut would hurt the Labour government, which has borrowed a huge amount of money and is now trying to repay its debt. The government is also trying to recover from the credit-crunch crisis and the disastrous Northern Rock event.
Regarding Spain, speaking telephonically from Madrid, Urquhart Stewart said that the country’s economy is already suffering. The Spanish economy is overheating, the housing market has gone into reverse and the strong Euro is affecting export prices.
Throwing fuel on the fire, French President Nicolas Sarkozy said the price of oil was likely to continue to rise, suggesting that the EU should consider capping the value added tax on fuel to help countries deal with surging oil prices. Elefterios Verivakis, a Greek former energy minister, told New Europe that if the EU was to follow Sarkozy’s suggestions, that would hurt the countries’ state budgets.
Ferran Tarradellas Espuny, spokesman for EU Energy Commissioner Andris Piebalgs, said the European Commission is not planning to put pressure on Member States to cut fuel taxes. “We consider this will not be the right policy,” he told New Europe. “The main reason is that it will send an awful sign to the oil-producing countries. We will be simply saying: ‘Okay you continue to go up with your prices because we will go down with our taxes.’ And that will be a terrible mistake.”
At the same time, having high prices of final oil products has promoted energy efficiency. Moreover, having high taxes has served as a cushion for the volatility of prices because the crude oil price is only a percentage of the final price of gasoline at the pump.
The EU energy spokesman noted that the Commission has been taking all the necessary structural measures to deal with high oil prices, including promoting energy efficiency, plans to have a target for biofuels and renewable energies in general, and promoting more energy-efficient transport modes.
The key problem is the base price of crude and that remains high. There is a lot of speculation on that price and the supplies of available, tradable crude are very tight. “All it takes is a small constriction of that crude to cause a spike upwards but equally, as the global economy slows and there is some relaxation in that availability, you’ll see the price going below 100 dollars again,” Urquhart Stewart said.
At the same time, oil prices could easily spike upwards. There is no shortage of oil, but there is a constriction in the availability because of the limited amount that is coming through the refineries, which are working at full capacity. US refineries stretch to meet demand. “America hasn’t built a new refinery in 30 years,” the Seven Investment Management director said.
“What it would take for oil to get up to 200 dollars per barrel? The answer is a further constriction in capacity brought about by either refineries taken out of production for service or an accident, or political issues out of Venezuela or Nigeria or a missile fired at a tanker in the strait of Hormuz or a sudden recovery of the global economy,” Urquhart Stewart said, adding that the later is very unlikely. The global economy is likely to slow down further as inflationary pressures increase. “Oil prices are likely to climb higher as political and economic factors persist,” Verivakis said.
High oil prices have helped develop new technologies for exploration and expensive projects that before were not even being considered because they were expensive, like in Barents Sea or in the Gulf of Mexico, now make good business sense. But for now, everyday motorists like myself will keep feeling the squeeze of high gas prices at the pump.