Oil Tax Cuts Help the Kremlin and Punish Ukraine

Oil Tax Cuts Help the Kremlin and Punish Ukraine

The oil market is desperately in need of demand destruction. Governments should either be encouraging behavioral changes such as using more public transportation or allowing expensive fuel to force consumers to change.

Instead, industrialized countries are doing the opposite. Call it demand “construction.” From Germany to New Zealand, and from England to California, policymakers are either cutting taxes on gasoline and diesel or offering blanket, untargeted energy subsidies. Both will probably boost oil demand at the worst possible time.

The policies are, of course, wildly popular. But they are not only economically wasteful, they will also do geopolitical damage. Fuel tax cuts are essentially a subsidy to Vladimir Putin, and they hurt the effort to end the war in Ukraine. Think about it: If oil becomes more affordable, consumption rises. The higher oil demand goes, the higher oil prices go, too, and the more money the Kremlin makes. Those extra petrodollars can go toward killing more Ukrainians.

According to the International Energy Agency, the global oil market is likely to be short by as much as 3 million barrels a day by summer if Russian crude production drops as anticipated. That hole amounts to what France and the U.K. together normally consume in a day. Part of the fuel shortfall would be cushioned by drawing down commercial and strategic oil stockpiles. But managing it will also require lower demand.

“Faced with what could turn into the biggest supply crisis in decades, global energy markets are at a crossroads,” the IEA said earlier this month. To respond, the world needs to reduce oil consumption — and quickly. That requires adopting 1970s-style conservation policies. The IEA, which has been preparing for an oil crisis since its founding more than 40 years ago, recently released a 10-point plan of behavioral changes that could reduce consumption over time. Changes include reducing highway speeds, lowering fares for public transportation and banning the use of cars in large cities on Sundays.

And yet IEA member countries, which include the likes of the U.S., Japan, Germany, the U.K., France and South Korea, are all currently doing the opposite. Rather than trying to reduce demand, they are favoring policies that will sustain or even lift it.

Among the worse examples is what California Governor Gavin Newsom has proposed: a $400 direct subsidy per vehicle registered in the state, capped at two cars per person. That measure alone will cost $9 billion. The money, if the proposal is approved, will be sent in the form of debit cards and will benefit every Californian, irrespective of wealth. This is a textbook regressive tax policy. On top of that, Newsom has proposed more than $1 billion in fuel tax breaks, including a one-year cut in diesel duties. Compare this with how the state is planning to reduce fuel demand: It’s offering $750 million in grants for bus and rail agencies to provide free transportation for merely three months.

California isn’t alone. Japan offers another example of terrible energy policy, with a direct subsidy to oil refiners to produce cheaper gasoline. And then there’s Europe, where governments are racing each other to announce ever larger tax cuts on gasoline and diesel consumption. The U.K. government announced a cut to fuel duties on Wednesday. On Thursday, Germany revealed an even larger tax cut for gasoline consumption.

These tax cuts and subsidies go against the spirt — and probably the letter, too — of the most recent international climate change deal. Only a few months ago, the world’s leaders agreed during the United Nations’ COP26 climate summit to “phase-out of inefficient fossil fuel subsidies.” They’re straying far from their promises.

What should OECD countries do instead?

First, they should support the IEA campaign for oil savings. They don’t need to apply every recommendation, but politicians should urge everyone to save energy. Unsexy policies — like tax breaks for house insulation, for example — can also bring longer-term energy and climate change benefits. Although calling for energy conservation has been politically toxic since Jimmy Carter did so during the 1979 oil shock, the message today might resonate given the focus on Ukraine and climate change. The IEA also needs to play a role by calling the bad policies its members are announcing. 

Second, countries need to focus specifically on supporting poor families. The response to the 2022 crisis must look different to that from the 1970s — above all because our economy and employment look different. Many jobs in the gig economy rely on cars and motorbikes, and policymakers should be aware of that. Targeted tax breaks and subsidies to the most vulnerable can play a role. Supporting public transportation also benefits everyone but especially lower-income urban dwellers.

The more OECD governments go for demand construction, the harder the oil market will fight back with higher and higher oil prices. And the market, ultimately, will win. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of "The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources."

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