Cutting Fuel Excise is Pointless

It look almost certain at this point that tomorrow’s budget will include a reduction in petrol excise to ‘ease cost of living pressure’. Our federal government isn’t the only one jumping at this shadow. Governments from the USA to France have also rushed to take action to reduce petrol prices at the pump.

The problem is these polices are counterproductive. High petrol prices aren’t a problem to be fixed, they are the solution to demand exceeding supply in the oil market. Higher prices reduce demand and bring it in line with the current constrained supply.

Cutting taxes on petrol will reduce the price at the pump, which will increase demand. Oil prices will react by increasing further until we get back to equilibrium, with pump prices right back where they were. A cut to fuel excise achieves nothing and is actually counter productive. It costs the government much needed revenue, does nothing to reduce prices at the pump, and undermines the sanctions against Russia by increasing the value of their oil exports. And that’s without mentioning the positive impact on global greenhouse emissions that expensive oil is likely to bring.