There's speculation that the UK Government may back away from its plans to raise fuel duties later this year and its sneaky increase in annual licensing fees for older vehicles. However, today's Times quotes an "unnamed official" who says there can't be a full-scale retreat like the recent £2.7 billion giveaway on the 10 pence tax rate. Says the unnamed one: "money doesn't grow on trees".
I'm glad he's got that figured out. And it would be nice if the Government, with its blank cheque for the Olympics and its megabucks defence spending plans (missiles, aircraft carriers), and politicians, with their demand for a £23,000 per year no-questions-asked expense allowance, recognised that money doesn't grow on trees for taxpayers either.
Wednesday 28 May 2008
Friday 23 May 2008
The weird economics of oil
My old pal Kaletsky was at it again in the Times earlier this week, telling us that we should rip up our economic textbooks, because the record price level for oil is nothing to do with fundamentals like supply and demand. According to Anatole, it's all caused by speculation. It's the usual mix of bombast, misused statistics and a total inability to understand how financial markets actually work. Look it up for yourself if you want: I'm going to take a different tack.
Sure, $135 a barrel is expensive by historical standards, but we know oil users will stump up a lot more -- because they already are. UK prices for unleaded fuel, near £1.13 per litre at the time of writing, equate on a rough calculation to well over $350 a barrel. Prices in much of Europe are a bit lower (because of the strength of the Euro) and they're lower still in North America (because of stupidity), but the plain fact is that consumers throughout the developed world are signalling to the producers that they are willing to pay up to fill up.
I like to look at this in terms of the slightly arcane theoretical concept of economic rent. Economic rent is the difference between the price people are willing to pay for something, and what it would actually take to induce the producer to produce it. (There's a fuller explanation here).
It seems people are prepared to pay $300 a barrel, but Saudi or Iraq, which are still swing producers, and so can be seen as representing the marginal (i.e. next) barrel of output, have costs not far above a dollar a barrel. That gap is economic rent, and energy prices worldwide are all about determining who gets to keep the rent. In many of the OPEC countries, where fuel is very cheap, it's the consumer who benefits; in North America, where fuel taxes are very low, the rent is divided between the consumer and the Government. In Europe, with its history of high fuel prices, the Government is grabbing a large chunk of the rent for itself. (I'm leaving the oil companies aside for the moment, but we'll come back to them).
As I see it, right now the producers are seizing back some of the economic rent from oil users consumers in the consuming countries, and their governments. It's a bit rich for the latter to complain when taxes still make up such a high proportion of the final price: there's no logical principle that says governments have a right tomore of the revenue from a diminishing resource than the people who actually own it.
I've always assumed that the producers have always known they could charge much more for oil, but have held off because they knew that higher prices for crude would spur research into alternatives. This is indeed happening now, with increased production from expensive alternatives like the Alberta tar sands, renewed exploration in existing non-OPEC producers including the USA and UK, and the global, very possibly counterproductive push into biofuels. All of these require much higher prices than the Saudis do (i.e. the economic rent is much smaller), but the price mechanism is working as it should. However, all of these alternatives will take a long time to bear fruit, so OPEC is making hay while the sun shines.
What about the oil companies? They have always claimed that they don't benefit from high oil prices, yet to the surprise of no-one both BP and Shell in the UK recently announced a staggering increase in profits for the first quarter of this year. The part of this that I always find most amusing is that the companies always insist that selling fuel is unprofitable. Sure, it's not very lucrative for the guy manning the pump: the margin on UK petrol sales is apparently about 2 pence a litre, which is why they're so keen to lure you into buying sandwiches and chocolates when you pay for your fuel. But at the end of the day, all of the profits of the oil companies are derived from selling the stuff: there would be no margin in production, refining, storage transportation or anything else if there was no end buyer. The companies can allocate their costs and revenues between these stages of production in order to minimise taxes or to deflect public anger, but it's all derived from the consumer in the end.
My only conclusion here is that oil is a unique market, one in which statistics need to be viewed with even more scepticism than usual. Supply and demand still rule, but it can sometimes be hard to figure them out.
Sure, $135 a barrel is expensive by historical standards, but we know oil users will stump up a lot more -- because they already are. UK prices for unleaded fuel, near £1.13 per litre at the time of writing, equate on a rough calculation to well over $350 a barrel. Prices in much of Europe are a bit lower (because of the strength of the Euro) and they're lower still in North America (because of stupidity), but the plain fact is that consumers throughout the developed world are signalling to the producers that they are willing to pay up to fill up.
I like to look at this in terms of the slightly arcane theoretical concept of economic rent. Economic rent is the difference between the price people are willing to pay for something, and what it would actually take to induce the producer to produce it. (There's a fuller explanation here).
It seems people are prepared to pay $300 a barrel, but Saudi or Iraq, which are still swing producers, and so can be seen as representing the marginal (i.e. next) barrel of output, have costs not far above a dollar a barrel. That gap is economic rent, and energy prices worldwide are all about determining who gets to keep the rent. In many of the OPEC countries, where fuel is very cheap, it's the consumer who benefits; in North America, where fuel taxes are very low, the rent is divided between the consumer and the Government. In Europe, with its history of high fuel prices, the Government is grabbing a large chunk of the rent for itself. (I'm leaving the oil companies aside for the moment, but we'll come back to them).
As I see it, right now the producers are seizing back some of the economic rent from oil users consumers in the consuming countries, and their governments. It's a bit rich for the latter to complain when taxes still make up such a high proportion of the final price: there's no logical principle that says governments have a right tomore of the revenue from a diminishing resource than the people who actually own it.
I've always assumed that the producers have always known they could charge much more for oil, but have held off because they knew that higher prices for crude would spur research into alternatives. This is indeed happening now, with increased production from expensive alternatives like the Alberta tar sands, renewed exploration in existing non-OPEC producers including the USA and UK, and the global, very possibly counterproductive push into biofuels. All of these require much higher prices than the Saudis do (i.e. the economic rent is much smaller), but the price mechanism is working as it should. However, all of these alternatives will take a long time to bear fruit, so OPEC is making hay while the sun shines.
What about the oil companies? They have always claimed that they don't benefit from high oil prices, yet to the surprise of no-one both BP and Shell in the UK recently announced a staggering increase in profits for the first quarter of this year. The part of this that I always find most amusing is that the companies always insist that selling fuel is unprofitable. Sure, it's not very lucrative for the guy manning the pump: the margin on UK petrol sales is apparently about 2 pence a litre, which is why they're so keen to lure you into buying sandwiches and chocolates when you pay for your fuel. But at the end of the day, all of the profits of the oil companies are derived from selling the stuff: there would be no margin in production, refining, storage transportation or anything else if there was no end buyer. The companies can allocate their costs and revenues between these stages of production in order to minimise taxes or to deflect public anger, but it's all derived from the consumer in the end.
My only conclusion here is that oil is a unique market, one in which statistics need to be viewed with even more scepticism than usual. Supply and demand still rule, but it can sometimes be hard to figure them out.
Monday 19 May 2008
Dubya's part in Hitler's downfall
President Bush's recent speech to the Knesset has caused ructions back on the campaign trail in the US. Barack Obama seems to have decided that Bush's warnings against attempts to appease terrorists (sorry, "tearists" in Bush-speak) were aimed at him. Obama may be right to take umbrage, but I was struck (or rather, insulted) by another aspect of what Bush said. Here's the offending paragraph:
'Some seem to believe we should negotiate with terrorists and radicals, as if some ingenious argument will persuade them they have been wrong all along. We have heard this foolish delusion before. As Nazi tanks crossed into Poland in 1939, an American senator declared: "Lord, if only I could have talked to Hitler, all of this might have been avoided." We have an obligation to call this what it is – the false comfort of appeasement, which has been repeatedly discredited by history.'
Quite so George. Thank goodness that the rest of America was more alive to the Nazi threat than that (Republican) senator. That must be why it took the United States more than 26 months after the Nazi invasion of Poland to get involved in the fighting. Who knows how many lives might have been saved, Jewish or French or Danish or Norwegian or British, if the US had committed itself earlier?
Anyway, if Obama is saying that the US should try to talk to its enemies, he's not wrong, is he? You don't have to negotiate with your friends. And wasn't it Winston Churchill, nobody's idea of an appeaser, who said "Better jaw-jaw than war-war"? You remember Churchill, don't you George? Bit of a boozer, liked his cigars. He's the one who was leading the fight against Nazi Germany while your compatriots were sitting on their hands.
'Some seem to believe we should negotiate with terrorists and radicals, as if some ingenious argument will persuade them they have been wrong all along. We have heard this foolish delusion before. As Nazi tanks crossed into Poland in 1939, an American senator declared: "Lord, if only I could have talked to Hitler, all of this might have been avoided." We have an obligation to call this what it is – the false comfort of appeasement, which has been repeatedly discredited by history.'
Quite so George. Thank goodness that the rest of America was more alive to the Nazi threat than that (Republican) senator. That must be why it took the United States more than 26 months after the Nazi invasion of Poland to get involved in the fighting. Who knows how many lives might have been saved, Jewish or French or Danish or Norwegian or British, if the US had committed itself earlier?
Anyway, if Obama is saying that the US should try to talk to its enemies, he's not wrong, is he? You don't have to negotiate with your friends. And wasn't it Winston Churchill, nobody's idea of an appeaser, who said "Better jaw-jaw than war-war"? You remember Churchill, don't you George? Bit of a boozer, liked his cigars. He's the one who was leading the fight against Nazi Germany while your compatriots were sitting on their hands.
Friday 16 May 2008
Book title of the year
I've been doing a lot of research on family history, and have come across a very useful series of books published by the National Archives. They are designed to help researchers looking for ancestors in particular professions or other groups, so they have titles like "My ancestor was a merchant seaman" or "My ancestor was a Presbyterian".
Among these, you can find "My ancestor was a bastard"! Amazingly, the series also includes "My ancestor was a lawyer". Isn't that duplication?
Among these, you can find "My ancestor was a bastard"! Amazingly, the series also includes "My ancestor was a lawyer". Isn't that duplication?
Tuesday 13 May 2008
"Only the little people pay taxes"
So said Leona Helmsley, the notorious New York hotel owner. For trying to put this maxim into practice, the late "Queen of Mean" was jailed for tax evasion. (When Leona went to meet her maker, she left her fortune to her dog. Well, what else would you expect a bitch to do?)
In today's UK, Leona would probably be Gordon Brown's chief tax advisor. The Government has already watered down proposals to increase tax on the so-called "non-doms", wealthy foreign nationals who live in the UK but do not pay UK tax on their global income. It has watered down its proposals for capital gains tax reform, vastly reducing the burden on such worthy wealth creators as the buy-to-let investment crowd. Now it's about to back away from plans to tighten up the tax regime for the offshore income of UK based companies.
All of these retreats have come in the face of bare-faced threats from those wealthy souls who sensed that their oxen were about to be gored. The non-doms would quit the UK in droves, while UK companies would relocate their HQs to more "friendly" tax jurisdictions.
At the same time the Government has gone ahead with the abolition of the 10p income tax rate, a move which has increased the tax burden on on large numbers of the lowest-paid members of society. Oh sure, Alastair Brown is thrashing around trying to compensate some of those worst-affected, but the plain fact of the matter is that he can't help them all without reinstating the 10p rate. Still, never mind -- unlike the non-doms or the big corporations, the poor are in no position to up sticks and leave.
Things have come to a pretty pass when George Bush is doing more to help those hardest hit by the slowdown in the global economy than Gordon Brown is.
In today's UK, Leona would probably be Gordon Brown's chief tax advisor. The Government has already watered down proposals to increase tax on the so-called "non-doms", wealthy foreign nationals who live in the UK but do not pay UK tax on their global income. It has watered down its proposals for capital gains tax reform, vastly reducing the burden on such worthy wealth creators as the buy-to-let investment crowd. Now it's about to back away from plans to tighten up the tax regime for the offshore income of UK based companies.
All of these retreats have come in the face of bare-faced threats from those wealthy souls who sensed that their oxen were about to be gored. The non-doms would quit the UK in droves, while UK companies would relocate their HQs to more "friendly" tax jurisdictions.
At the same time the Government has gone ahead with the abolition of the 10p income tax rate, a move which has increased the tax burden on on large numbers of the lowest-paid members of society. Oh sure, Alastair Brown is thrashing around trying to compensate some of those worst-affected, but the plain fact of the matter is that he can't help them all without reinstating the 10p rate. Still, never mind -- unlike the non-doms or the big corporations, the poor are in no position to up sticks and leave.
Things have come to a pretty pass when George Bush is doing more to help those hardest hit by the slowdown in the global economy than Gordon Brown is.
Wednesday 7 May 2008
Referendum follies
The Labour leader in Scotland, Wendy Alexander (see? you've learned something already!) has taken it upon herself to urge the SNP government at Holyrood to proceed quickly with its plans for a referendum on independence. It's unlikely in the extreme that the wily SNP will fall for this: it's aiming for 2010, and hoping that there will be a Tory government in Westminster by that time.
However, Ms Alexander has shaken the tree south of the border, with letter-writers and columnists lining up to say that it can't just be left to the Scots: the rest of the UK ("ROTUK" -- remember you heard it here first) will have to be allowed to vote on the issue as well. As lunatic political ideas go, this one rates pretty high. Supposing a UK-wide referendum on Scottish independence is held. There are four possible outcomes, and two of them are pretty simple: if both Scotland and ROTUK vote that Scotland should stay, no problem; if both vote that it should go, then it's just a question of negotiating the details.
But what if Scotland votes to leave, and ROTUK insists that it stays? Or, what of Scotland votes to stay, but ROTUK decides it wants to boot the Scots out? An IRA-style campaign on the streets of Glasgow? An Israeli-style security wall across Northumberland and Cumbria?
Some of the srguments for a UK-wide referendum seem to be based on the idea that the act of union of 1707 was the free choice of the English and Scottish peoples. (I'm using those terems deliberately: union with Ireland was still almost 100 years away, and Wales was effectively seen as part of England). I doubt if this would hold a lot of water if it were put to a legal test today, given the lack of any true democracy at the time and the huge discrepancy between the populations of the two countries.
No, for better or worse, the decision on whether to go or stay will be taken by the Scots. All that ROTUK can do is to influence the rules, and be very clear about the consequences of voting for independence. It would be legitimate for Westminster to insist on an unequivocal question on the ballot paper, failing which it might threaten not to negotiate. And as for the consequences, well, to take just one example, SNP leader Alex Salmond has said an independent Scotland would continue to use Sterling as its currency. There's no reason ROTUK has to allow thia, especially as a free-spending, left-wing independent Scotland might make the job of the Bank of England much harder. At some point, the government at Westminster needs to spell these things out, but it's unlikely to be at the top of Gordon Brown'a agenda.
However, Ms Alexander has shaken the tree south of the border, with letter-writers and columnists lining up to say that it can't just be left to the Scots: the rest of the UK ("ROTUK" -- remember you heard it here first) will have to be allowed to vote on the issue as well. As lunatic political ideas go, this one rates pretty high. Supposing a UK-wide referendum on Scottish independence is held. There are four possible outcomes, and two of them are pretty simple: if both Scotland and ROTUK vote that Scotland should stay, no problem; if both vote that it should go, then it's just a question of negotiating the details.
But what if Scotland votes to leave, and ROTUK insists that it stays? Or, what of Scotland votes to stay, but ROTUK decides it wants to boot the Scots out? An IRA-style campaign on the streets of Glasgow? An Israeli-style security wall across Northumberland and Cumbria?
Some of the srguments for a UK-wide referendum seem to be based on the idea that the act of union of 1707 was the free choice of the English and Scottish peoples. (I'm using those terems deliberately: union with Ireland was still almost 100 years away, and Wales was effectively seen as part of England). I doubt if this would hold a lot of water if it were put to a legal test today, given the lack of any true democracy at the time and the huge discrepancy between the populations of the two countries.
No, for better or worse, the decision on whether to go or stay will be taken by the Scots. All that ROTUK can do is to influence the rules, and be very clear about the consequences of voting for independence. It would be legitimate for Westminster to insist on an unequivocal question on the ballot paper, failing which it might threaten not to negotiate. And as for the consequences, well, to take just one example, SNP leader Alex Salmond has said an independent Scotland would continue to use Sterling as its currency. There's no reason ROTUK has to allow thia, especially as a free-spending, left-wing independent Scotland might make the job of the Bank of England much harder. At some point, the government at Westminster needs to spell these things out, but it's unlikely to be at the top of Gordon Brown'a agenda.
Cop a load of this!
The former chief of the Dyfed Powys police force in Wales took early retirement in November last year, at the age of 58. An internal inquiry has just revealed that he was guilty of several severe breaches of police procedure that would almost certainly have led to his dismissal, had he not jumped ship first.
The ex-chief was allowed to retire on a full pension, estimated at about £80,000 per year, plus of course complete inflation protection. I'm sure the good people of that part of South Wales, where average annual incomes are closer to £20,000, are very happy for him. Iechyd da, pennaeth!
The ex-chief was allowed to retire on a full pension, estimated at about £80,000 per year, plus of course complete inflation protection. I'm sure the good people of that part of South Wales, where average annual incomes are closer to £20,000, are very happy for him. Iechyd da, pennaeth!
Fuel tax confusion
The UK Government is coming under pressure to abandon the planned 2p a litre increase in fuel taxes that is scheduled for October. Indeed, with global oil prices setting new highs every week, and the average price of a litre of unleaded somewhere near £1.10, there are calls for it to go further and reduce its current tax take, which amounts to about two-thirds of the pump price.
There are suggestions that the Government can "afford" to make such a move because it is raising much more than expected from fuel taxes, thanks to the high price. Most of the tax take is accounted for by excise duties, which aren't affected by the world oil price. However, the Government also collects VAT, at the standard rate of 17.5%, on all fuel sales. This can, of course, be reclaimed by the haulage industry and others, but not by private motorists. One motoring organisation, the RAC, claims that the Government could afford to cut fuel duties by 9p a litre and still rake in as much revenue as it projected at budget time.
This is almost certainly wrong. The extra VAT on fuel is not money out of thin air. People are having to cut back either on savings or on other purchases in order to pay the higher cost of fuel. The household savings rate in the UK is very low, so most of the extra spending on petrol can be assumed to be offset by lower spending elsewhere. To the extent that the things people are cutting back on are themselves liable for VAT -- and almost everything apart from food bought for home consumption is -- the added taxes coming in via the fuel pump are offset by smaller receipts from other consumption items.
Of course, this works both ways. The Government can't really claim that it can't afford to cut fuel taxes, unless it thinks that people will save the money rather than spend it on other VAT-generating items. It's a policy choice, rather than a fiscal dilemma: with inflation rising and household budgets under pressure, is a fuel tax cut the best way for the Government to provide a bit of relief?
There are suggestions that the Government can "afford" to make such a move because it is raising much more than expected from fuel taxes, thanks to the high price. Most of the tax take is accounted for by excise duties, which aren't affected by the world oil price. However, the Government also collects VAT, at the standard rate of 17.5%, on all fuel sales. This can, of course, be reclaimed by the haulage industry and others, but not by private motorists. One motoring organisation, the RAC, claims that the Government could afford to cut fuel duties by 9p a litre and still rake in as much revenue as it projected at budget time.
This is almost certainly wrong. The extra VAT on fuel is not money out of thin air. People are having to cut back either on savings or on other purchases in order to pay the higher cost of fuel. The household savings rate in the UK is very low, so most of the extra spending on petrol can be assumed to be offset by lower spending elsewhere. To the extent that the things people are cutting back on are themselves liable for VAT -- and almost everything apart from food bought for home consumption is -- the added taxes coming in via the fuel pump are offset by smaller receipts from other consumption items.
Of course, this works both ways. The Government can't really claim that it can't afford to cut fuel taxes, unless it thinks that people will save the money rather than spend it on other VAT-generating items. It's a policy choice, rather than a fiscal dilemma: with inflation rising and household budgets under pressure, is a fuel tax cut the best way for the Government to provide a bit of relief?
Thursday 1 May 2008
Daily Mail soft on crime!
Well, one sort of crime at least. The paper's front-page headline today is "Milking the motorist". It's not about high fuel prices, as you might expect. The Mail's beef is that 30% of UK motorists will receive either a speeding ticket or a parking fine this year.
Hang on a second, though: for law abiding motorists who don't speed and don't park where they shouldn't, the rate is actually very close to zero. Why is the Mail, usually so hot both on actual crimes and on things that it thinks should be crimes, so forgiving when it comes to motoring offences? I mean, far more people are killed each year in road accidents in the UK, many of them as a result of excess speed, than are killed by the armies of feral youths, out-of-their heads boozers, Islamic militants, Polish migrants and all the rest of the Mail's pantheon of loathing. Apparently the paper will lend its support to any middle-class moan, however ill-advised.
Hang on a second, though: for law abiding motorists who don't speed and don't park where they shouldn't, the rate is actually very close to zero. Why is the Mail, usually so hot both on actual crimes and on things that it thinks should be crimes, so forgiving when it comes to motoring offences? I mean, far more people are killed each year in road accidents in the UK, many of them as a result of excess speed, than are killed by the armies of feral youths, out-of-their heads boozers, Islamic militants, Polish migrants and all the rest of the Mail's pantheon of loathing. Apparently the paper will lend its support to any middle-class moan, however ill-advised.
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