Monday, March 28, 2011

Effects of the Oil Price Rise

The Mirror reports some interesting statistics on the effect of the recent oil price rises.

Petrol sales fell by 9.5% over the three months up to December compared with the same period a year earlier, according to the Office for National Statistics.

the number of drivers paying the central London congestion charge fell by 500,000 between 2009 and last year, despite no rise in the price.

A Department for Transport study measured the average delay time on the slowest part of 100 main roads. It found the average journey time over 10 miles fell to three minutes, 49 seconds. In July 2007 it was four minutes, 19 seconds.

So it looks like people were driving a lot more during the 'war on the motorist, and are driving a lot less now the Tories have declared a ceasefire. Aren't they listening? Don't they know what's good for them?
This does raise a few questions for Government policy. In terms of economic growth, there are three principal scenarios that could play out:

  1. The economy grows and the oil price drops. (the have-your-cake-and-eat-it scenario)
  2. The economy grows but the oil price remains high and on an upward trajectory
  3. Economic growth is weak.
 The first scenario is the one the Government seems to be assuming and aiming for. The 2011 budget is aiming to stimulate growth, transport policy contains very little that is aimed at reducing oil use, and changes to planning permission will make it easier to provide car parking and likely make it easier to develop lands without consideration of transport issues - hence more traffic. However, it's unlikely that the UK economy could grow without a worldwide recovery, and a worldwide recovery would lead to increasing demand for oil and therefore an increasing oil price: in other words, the second scenario.

The second scenario is the most likely outcome if the Government's plans to stimulate growth succeed. However, an economy that is still reliant on oil-fuelled transport when the oil price is high will suffer from an increasing amount of the proceeds of growth being siphoned off to the oil-producing countries. Because the Government are not taking active steps to reduce miles driven, congestion will likely increase, again acting as a brake on growth. Which leads to the third scenario.
Weak economic growth will at least limit our dependency on oil, but the reverse is also true - a dependency on oil will limit economic growth. We are seeing that today: with a high oil price, people are limiting their car journeys, and cutting back on consumer spending. With better alternatives to the car, and more locally-based businesses and facilities, people would be able to spend less money on fuel and spend the savings at UK businesses, which would be likely to create economic growth.

The biggest problem with the Government's strategy is that they are putting all their bets on the horse that's least likely to win the race. Even if we do get strong growth and a declining oil price, we'll be left with the problem of congestion which will tend to throttle growth barring massive investment in roads. In contrast, investing in alternatives to fossil-fuelled transport and reducing car-dependency will pay dividends in all of the scenarios outlined above. The one significant transport investment the Government is making - high-speed rail - will have a very limited effect especially in the absence of measures to limit car use, and no effect at all in the short term.

I've not even mentioned whether growth driven by increasing consumption is a good thing, or the carbon implications of any of the above. You can bet the Government haven't either. They seem to be in denial about the fact that the world has changed and oil prices will likely continue to be a problem that can't be solved with a penny-a-litre duty cut. Not all Tories are so naive. The Independent reported International Aid Minister, Alan Duncan, a former oil trader, suggesting that it was not inconceivable that motorists would end up shelling out £4 a litre. "When I said oil would go through $100, people thought I was bonkers. Now we are not far off $130," he said. If that happens, George Osborne will be left with no fuel in the tank.

1 comment:

  1. What usually happens to the price of a finite resource as it becomes scarcer, and more expensive to extract?

    The simple basics of 'supply and demand' seem to have gone out of the window, to be replaced with the nonsense of 'stabilising' the price of oil, which carries with it the assumption that the price of oil is only temporarily high.