A Comment from Britain on the Effects of Rising Fuel Costs

Foot off the pedal – Rising fuel costs begin to change behaviour

 Jul 10th 2008
From The Economist print edition

Illustration by Claudio Munoz

ONE of the most popular programmes on British television is “Top Gear”, a Sunday-night celebration of the motor car that owes its success to an irreverent mix of speed, stunts and smoking tyres. But viewers of the first instalment in the show’s new series, broadcast in June, had a slightly different experience. Following a race designed to find the most fuel-efficient supercar, Jeremy Clarkson, one of the hosts, gave a short soliloquy on how motorists could cut their fuel bills by changing their style of driving. Visitors to Mr Clarkson’s blog can find a list of uncharacteristically worthy fuel-economy tips, which include avoiding aggressive acceleration and braking, switching off unnecessary gadgets and even driving more slowly.

This sensible advice from the nation’s petrolhead-in-chief is only one piece of evidence that high oil prices are beginning to alter consumer behaviour. The AA, a motorists’ club, reports that fuel prices rose at their fastest-ever rate last month (by 5.6p per litre for petrol and by 7.4p for diesel). Garages report drops in fuel sales of 5-10%, and say that buying patterns have changed as consumers use their second cars less. Government officials maintain that motorists are driving more slowly, and that high fuel prices are reducing congestion in clogged city centres.

Nor is it only motorists who are being squeezed. The rail industry thinks travellers are beginning to abandon their pricey cars for public transport, but public transport is having to economise as well. FirstGroup, which runs bus and train services across the country, is encouraging frugality by suggesting that its drivers let trains coast downhill and forbidding bus drivers from idling their engines. Ferry services to Ireland are sailing more slowly, and even airlines have been trimming speeds. Pricey petrol is affecting shopping habits, too, as consumers avoid long trips to out-of-town retail parks. Data from Footfall, a firm that tracks customer numbers, shows that visits to out-of-town shops have fallen by 7.4% since May, compared with a drop of only 3.6% in visits to town centres.

More worrying for the government are the political consequences. Expensive oil will swell the Treasury’s coffers with a combination of petrol-tax receipts and revenue from North Sea production (see article), a welcome boost for a government in a fiscal tight spot. But it also reminds drivers that much of the pump price is accounted for by fuel duty. Petrol duty is 50.35p per litre, and that on diesel is 56.94p, making British diesel among the most expensive in Europe. A combination of angry motorists and disgruntled hauliers, who have been hinting at a re-run of the strikes that paralysed the country in 2000, mean that a 2p rise in fuel tax planned for October will probably be abandoned. The Conservatives have proposed letting taxes vary with oil prices to ensure that motorists always pay the same amount—an appealing piece of populism from the party that concocted the policy which has brought fuel taxes to their current level.

The ultimate impact of such changes depends on how long oil prices remain at their current eye-watering levels. Stephen Glaister, an economist at Imperial College, London and the director of the RAC Foundation, a motoring lobby-group, points out that demand for both motoring and fuel is reasonably elastic in the long term. A sustained period of high prices could lead to significant changes in behaviour.

That, in turn, could affect a whole slew of government planning decisions, from predictions of tax revenues to subsidies for renewable energy and investment in airports, roads and railways. The case for expanding Heathrow, for example, set out in the aviation white paper in 2003, relied in part on official forecasts that oil would cost $25 a barrel in 2000 prices ($31 in today’s). Predicting the oil price is a fool’s game (oil was falling again as The Economist went to press), but even the most diehard oilmen think a return to such cheap fuel is unlikely. With airlines’ fuel surcharges boosting ticket prices and slowing the growth in demand, those opposed to a bigger Heathrow are rightly urging a re-think.

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