A little reflection suggests that :

• far from being a Federal tax to replace other Federal taxes, as far as petrol is concerned the GST has ended up as a tax on another tax (the base for GST calculation includes the excise duty)
• the environmental consequences of just removing the fuel excise - knocking 45% off the city price - would be horrendous
• replacing the fuel excise with a state road user charge of roughly equivalent magnitude could be a major step towards a more efficient transport pricing and funding system without causing major social disruption

The introduction of sort-of-GST has not been kind to transport policy so far but here is an opportunity to turn it to advantage in a way that should please both taxation and transport theorists.

Update, 1 March 2001

During February, voter dissatisfaction resulted in two massive Coalition defeats in State elections and ever-more-ominous polling federally. In regional areas much of this discontent crystallised around high fuel prices.

On 1 March 2001 Federal Government announced that they would cut fuel excise duty by 1.5c/litre (which seems to me only to cancel the increase they imposed one month previously) and, more significantly, remove the automatic indexation of excise level (and hence GST as well) to inflation.

Earlier Goverment protestations of the economic irresponsibility of this were presumably found to be context-dependent.

• The essence of politics is arriving at generally acceptable trade-offs in the face of conflicting interests and it would be most inappropriate for politicians to remain indifferent to issues about which parts of the community are highly troubled.
• Lasting solutions stem from robust policy-making rather than easy interventions and ad hoc tinkering. Fuel taxation policy seems grounded in pragmatism rather than analysis (if there was ever any doubt - see original comments).
• Claims that fuel prices are largely beyond Government control are spurious at the moment, when about half the user cost is in the form of one sort of taxation or another. But they won't remain that way, as the long-term trend for world oil prices is inexorably upwards (see commentary by me and others elsewhere on this site). Hence there is short-term urgency in establishing a robust long-term policy for dealing with fuel prices and associated issues of transport pricing and charging.
• The suggestion in the first round of comments that "replacing the fuel excise with a state road user charge of roughly equivalent magnitude could be a major step towards a more efficient transport pricing and funding system without causing major social disruption" seems even more timely one month on.

Update, 2 August 2005

The pricing environment changed dramatically between 2000 and 2005. The price of crude oil doubled but the Australian dollar strengthened relative to the American.

Using the breakdown already given, and maintaining the same percentage for refinery profit and wholesale and retail margins, but the same absolute amount for Excise Duty and urban freight costs, calculations show that the price of urban fuel would be about $1.17 per litre. This is not far from the actual situation in 2005.

To reach a pump price of $2.00 per litre, either the cost of crude oil would have to double again and then rise even further to $US134 per barrel, while the exchange rate remained the same, or the price would have to rise to $US95/barrel while the exchange rate fell back to its 2000 level (or some other combination of changes).

The table below shows the effect of some combinations of crude price change and exchange rate change. NB if oil ceased to be traded in US dollars - perhaps in euros - a different exchange rate would be applied.

Update, 2 November 2007

At a time when the price of oil is soaring (now heading rapidly for $US100/barrel), the price of petrol at the pump in Australia seems little affected. Why is this?

The answer is that oil is priced in US dollars, and the exchange rate for the Australian dollar relative to the US dollar is also soaring. The Australian Institute of Petroleum web site gives the average price of unleaded petrol in Sydney as $A1.27 per litre on October 28. Using the AAA price breakdown from 2000, and updating it using the above assumptions for an oil price of $US88/barrel (the average closing price for the week ending 26 October) and an exchange rate of $US0.9 - $A1, and recalculating, we find that our assumptions lead to an urban pump price of $A1.29 per litre.

This suggests that the structure of petrol prices in Australia has not been affected by the volatility in the price of crude, which is mainly due to the decline of the value of the US dollar.

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