How will the government respond to increasing oil prices?

So far, there has been remarkably little fuss about the amazing hike in oil prices which have now hit the $70 barrel mark. At the pumps, petrol is over 90p per litre and heading for that magical £1 figure.

Maybe it is only when the quid a litre mark is reached that the price of fuel will finally start causing a furore but in the meantime, it is worth noting that the present oil crisis merely highlights a two decades of wasted opportunity since the last one. Transport has long been too cheap in terms of the environmental damage it causes but precious little has been done to invest in the more environmentally friendly alternatives. After all, even with the latest price rises, petrol is still cheaper in real terms than in 1981 and cars are – apart from the ridiculous 4x4s – generally more fuel efficient. And aviation fuel still remains entirely untaxed.

The petrol price rise is likely to deter some people from using their cars and even encourage greater use of the railways. But, of course, there is not the capacity on the railways to absorb such increases. It was precisely this realisation that made the government shy away from its original targets in the 10 year plan launched in July 2000 for a 50 per cent increase in passenger numbers on the railways. The Treasury realised that would cost too much money in terms of extra rolling stock and more train paths on the track.

In a rational world, the government would have been thinking through this issue and paying for the extra transport infrastructure which everyone knows is needed. And on the demand side, it would have been doing a lot more to reduce the need for oil through environmentally forms of power generation and universal schemes for home insulation. Instead, we have a situation where the crazy structure of the railways has made them unaffordable and effectively prevented any rail-based solution to the transport crisis.

So how will the government respond if oil prices continue to rise? At the moment, it is trying to duck the issue and avoid any policy initiatives. But in the longer term, ministers will be forced into making some hard decisions such as whether to alleviate the tax burden on fuel. A better suggestion has come from the UITP, the public transport federation, which is arguing that governments should earmark a percentage of the extra tax revenue from fuel duty for investing in public transport. That would be a clever move in response to demands that fuel duty should be reduced in order to keep the cost of petrol lower. Moreover, by reducing demand for petrol – since more people would use public transport instead of their cars – it would help stabilise the price of fuel.

And what about a massive investment in facilities for cycling, something that Alistair Darling has refused to do. Cycling England, of which I am a board member, gets a paltry £5m per year whereas it demanded £70m to make a real difference quickly through investing in facilities and marketing.

A courageous government would be saying that the fuel price is a good thing and the market is simply reflecting a world wide scarcity. Indeed, doesn’t the Labour government believe that the market is the best way of determining the allocation of economic resources? And that in an efficient market, users pay all the external costs of the products they use – in other words, car drivers would pay for the environmental damage their addiction to driving causes. And if not, why not?

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