Solutions to the problem of rising automobile fuel costs

Anyone who owns or drives an automobile is aware of the dramatic increase in gasoline and diesel prices over the past year. There are many reasons for this increase, from rising demand for automobile fuels in the United States, China, and India, to the declining production of light, sweet crude from various OPEC members and other regions, such as the North Sea.

Not surprisingly, many North American consumers have a feeling of powerlessness as the price of these fuels continues to increase. In reaction to this, individuals, groups, and politicians are calling for action -- the question is, what type of action, if any, is going to be beneficial?

Well, let's consider some of the solutions that have been put forward over the past few months.

The most common call is for governments to cut taxes. In Nova Scotia, the sale of gasoline and diesel fuel is subject to three taxes: a federal excise tax ($0.10 per litre), a provincial motive fuel tax ($0.155 per litre for gasoline and $0.154 for diesel), and the HST (15 percent: 7 percent federal plus 8 percent provincial), which is applied to the price of the fuel and the federal and provincial taxes.

In 2003 (the last year for which data is available), Nova Scotians used about 1.2 billion litres of gasoline. The federal excise tax and Nova Scotian motive fuel tax generated about $124 million and $192 million, respectively for each level of government. The federal government has said that it will not remove the excise tax, and over the past 18 months, the Nova Scotian government has repeatedly rejected calls to drop the price of its fuel tax. The HST is the only possible tax that can be changed.

The total HST collected on a litre of fuel is the sum of the HST on the federal excise and provincial motive fuel taxes, and the HST on the price of the fuel. The HST on the taxes is about $0.038, regardless of the price of the fuel, since the taxes are a constant $0.255. However, the HST on the fuel varies with the price of the fuel; for example, if the pre-tax price of a litre of fuel is $0.75, the HST is $0.113, whereas the HST on litre of fuel with a pre-tax price of $1.00 is $0.15

With the exception of the Nova Scotia NDP, no other provincial party appears to be ready to forego the taxes collected from the HST. The NDP has proposed removing the 8 percent provincial component of the HST on the federal and provincial taxes collected from the sale of automotive fuels. The HST on the taxes is, as mentioned above, about $0.038 per litre; the provincial component is about $0.0204.

If the NDP's proposal were implemented, the savings on a 50 litre fill-up would be about $1.02. Someone purchasing 2,500 litres a year would save about $53. These small savings for the consumer would have a noticeable effect on provincial tax revenues, as the province would stand to lose over $24 million.

Another proposal is to boycott service stations tied to oil companies that appear to be gouging the public with high prices. Aside from the obvious problem of potentially having to drive long distances to find a non-boycotted service station, it is generally conceded that the only people who get hurt during a fuel boycott are the service station owners, not the oil companies.

If boycotting service stations won't stop rising prices, then the next "logical" approach is to regulate the price of automotive fuel. The original argument in Nova Scotia for doing this was to help rural service stations remain in business; however, price regulation is now being presented as a way of standing up to the oil companies in order to get cheaper petroleum products. On the surface, this appears to be a good idea, having a regulatory body setting the provincial price of automobile fuels; the catch is, oil companies are not required to sell their products in Nova Scotia.

Quite simply, if an oil company could sell its refined products at a better price elsewhere in the world, they would. This is happening in China, where refineries are producing gasoline and then exporting it, rather than selling it in China, because the price of gasoline is held artificially low by the Chinese government. A similar thing happened in September in Prince Edward Island and Newfoundland, where the regulatory agency quickly backed down when faced with the possibility that gasoline would not be distributed in the province because the oil companies considered the regulated prices too low.

If regulating the price of gasoline and diesel won't work, goes another line of reasoning, then why not nationalize the Canadian oil industry and have a "made in Canada" price? According to a recent poll taken soon after the price of gasoline went above $1.00 a litre across the country, a majority of Canadians were in favour of nationalization. Ignoring the obvious questions of whether the United States would allow Canada to nationalize a petroleum industry dominated by U.S. companies, and if this could be done under the terms of NAFTA, it is worth noting that most of Nova Scotia's petroleum products come from international sources (primarily the North Sea). Just how Nova Scotians would benefit from nationalization is not clear.

Although all of these ideas appear to have their merits, each one fails to recognize the fundamental problem, that the high prices now being paid for light, sweet crudes (that are ideal for refining into gasoline), are here, probably forever.

If this is the case, how are Nova Scotians supposed to travel in a time of rising oil prices?

There are three quick (although not necessarily easy, given many people's addiction to the automobile) solutions to this question. First, reduce the number of trips taken (in the U.S., two-thirds of all automobile trips are defined as "discretionary", meaning that people don't have to take them). Second, follow the vehicle manufacturer's instructions for correct tire pressure and remove any external objects, such as car-top carriers and bicycle racks, from the vehicle. Third, and possibly the most difficult for many drivers, but probably the most effective, is to reduce the vehicle's speed to 90 km/h.

As prices continue to increase, it will be necessary for the provincial government to show leadership by spending less on highway expansion and more on alternatives to the private automobile. One such approach would be to develop a provincial bus network, connecting cities, towns, and villages with regularly scheduled buses. Another would be to reinstitute passenger rail services where rail lines still exist, and interconnecting with small bus networks operating in local areas.

A new provincial transportation strategy, based upon bus and rail, will require long-term commitments from governments that recognize the impact rising transportation fuel costs will have on Nova Scotians. The capital costs and some of the operating costs of the proposed strategy can be covered by taking part of the provincial component of the HST on the sales of automotive fuels (for example, when fuel prices exceed $1.00 per litre).

The age of cheap energy based on fossil fuels is over -- the way homes are heated, electricity is generated, and goods and people are moved, will have to change because of rising fuel costs. Modifying the tax structure or boycotting service stations are, at best, short term solutions that will do nothing to prepare Nova Scotians for rising transportation costs.

A shorter version of this article appeared in the Atlantic Construction and Transportation Journal, November 2005