Economics and oil

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I didn’t watch all of Question Time this week but one thing that Eric Pickles said flew out at me (in what was otherwise an incoherent mess once Dimblebum had punctured his well rehearsed soundbite): before tax, the UK has the lowest priced diesel in Europe.

It sounds like a startling, killer fact, but it actually demonstrates what a pointless debate we are having in the UK at the moment about taxing fuel. We have understood since Adam Smith that price is determined by demand and supply. Tax petrol 2p and it doesn’t automatically go up 2p because competition will hold it down. Of course, because demand for petrol is inelastic, petrol stations have a bit of leeway and so can afford to pass the increase onto consumers. But sadly they retain the same advantage if you lower tax as well: if we cut the tax on petrol by 2p, you can guarantee that most of that saving will simply be eaten up as profit by oil companies which they can safely blame on global market forces. They won’t even be lying.

All this is sub-GCSE stuff, so how come I haven’t heard a single politician point this fact out?

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