From the Pipeline: Taxing petroleum products is good business - but for whom?

I was asked recently by a British journalist friend if I feel sorry for consumers that the price of oil is over $40 a barrel. My answer was that I am not but that I am sorry for them for the taxes that they pay over and above the price of oil in the international market.

When we talk about the price of oil we should not only look at today's high prices but also at the very low prices that have been around for long periods of time since 1986. The taxes added by the consumer's governments have always been high and rising in comparison with the prices of oil in the market. Taxes have been and will continue to be one of the most potent instruments in the hands of the government to curb the demand for oil and at the same time collect huge amounts of revenue for the treasury. The loss to the oil producers because of these taxes is enormous because the consuming governments can also redeploy the revenue into investment in other forms of energy and further efforts to reduce the demand for oil.

Unfair distribution

Last year, for instance, the average price of oil in the international market was around $31 per barrel, including shipping and insurance, to the G7 countries. However, the retail price of the products obtained from that barrel, or the composite barrel, was about $98 in the average domestic market of the G7 countries. The taxes were about $51 per barrel and the industry costs and margin were close to $16 per barrel. This unfair distribution of revenues has been a subject of contention between the producers and the consumers for a long time now. The consumers refuse to go into serious discussions on this issue on the grounds of sovereignty while at the same time they object to any measure taken by Opec, for instance, to limit production in the hope of stabilising prices.

The industrial countries, however, are not the same with respect to the level of taxes on petroleum products. That level of taxes ranges between the notorious and more notorious. For every barrel refined in the US last year, the government collected 26 per cent of the retail price as tax while the tax is 63 per cent in the UK and close to that in most European countries, and 38 per cent in Japan. In absolute terms, the governments collected, for every barrel of oil consumed, taxes to the tune of $14.3 in the US, $95 in the UK and $35 in Japan.

Opec estimates that between 1996 and 2000, the G7 industrialised countries collected about $270 billion annually in taxes on petrol-eum products while the Opec average revenue during the same period was about $170 billion annually. Any recent year would also demonstrate that the consuming governments are making good business from taxing their own people than the oil producers are doing by exporting their major source of income.

Of course, petroleum products are not equally taxed and the governments usually put the highest taxes on gasoline, the product that is most directly linked to the consumer. In the United Kingdom, for example, the average tax on gasoline last year was about $97 per barrel while on diesel it was about $73 for industry and $92 for household consumption. Heating oil is less taxed but still substantial at about $7.7 per barrel. Even low sulphur fuel oil for the industry is taxed at about $5.6 per barrel.

Major increase

It is surprising how taxes on petroleum products have gone up over time. The price of oil in 1985 was about $28 per barrel and was just slightly higher last year. Taxes for the composite barrel in the same period, however, have increased manifold sometimes and in some countries. In the US they have increased from $8.40 to $14.30 per barrel and in the United Kingdom from $27.70 to $95 per barrel in the same period. Even when crude oil prices declined precipitously in 1986 most governments raised taxes instead of passing the advantages of lower oil prices to the consumers.

There is one more point of contention between the consuming governments and oil producers and that is the fact that energy sources are not taxed equally. Taxation is heavily weighted against petrol-eum products while other energy sources get away with much less.

Given what I have said in this column, I am still sorry for the consumers for the taxes they are paying to their governments and not for the higher oil prices that we have seen for some time. Like many others I am waiting for the consumer revolution that says enough is enough.

- Saadalla Al Fat'hi is the former head of the Energy Studies Department at the Opec Secretariat and is currently working as an adviser.