It’s a worldwide carbon tax that every post-Paris-Agreement policy wonk could hope for: The equivalent of a C$ 70 per-tonne-of-CO2 tax on gasoline.
We can’t attribute the levy to any environmental political will. Oil markets can be thanked for ratcheting up the price of a West Texas barrel by $20 over the past nine months, from $50 to $70.
That 40% price hike at wellheads around the world trickles down to gas pumps, making the carbon-based fuel more expensive—similar in impact to a hefty carbon levy that taps the brakes on gratuitous consumption.
Who knew the wily OPEC cartel and its friends like the Russians were so environmentally minded?
Over the next year, geopolitics, tightening supply and rebalancing inventories have potential to make the price of a barrel go higher. Some even say $100 is nigh again regardless of what OPEC does. Relative to 2017 petroleum prices, that would be like imposing a carbon tax of C$ 170/tonne!
Consumers are already grumbling at the pumps. In Canada, gasoline and diesel are some 20% higher than last year. Down south, an average gallon of US gasoline has touched US$ 3.00 again. Prices of commercial products like jet fuel are also taking off.
In large part, carbon taxes on oil are meant to dampen demand and make substitute energy systems—like electric vehicles—more attractive.
So, will this round of inflating fuel prices make consumers temper their gas guzzling habits?
The answer is yes, though history and circumstance suggest that friction against global oil demand growth is not likely to be substantive until $100/B is breached again. Empirically, that’s what we saw happen earlier this decade, when oil prices had their last big run.
Yet things are different today. For one thing, the US dollar is a lot stronger now. On a trade weighted basis, major currencies are 20% weaker than before, which means today’s oil is 20% more expensive for international consumers. That, along with other various layers of taxation is why Canadian gasoline prices today are pushing C$1.40 as compared to say the fourth quarter of 2014; back then oil averaged around $US 70/B like today, but a litre of regular was averaging only $C 1.15.
The point is that global consumers are being hit with a double oil levy: Higher prices at the wellhead plus the added cost at the foreign exchange wicket to buy barrels that are traded in US dollars. As such, outside the United States, it’s possible the threshold for arresting oil consumption may be lower than US$100/B.
On the flip side, the global economy today is firing on all cylinders, unlike in the wake of the 2008 Financial Crisis. Joblessness is way down, especially in the United States, so consumers’ wallets are more resilient to the impact of higher fuel prices. Freeways are packed with increasingly obese vehicles everywhere I travel, domestically and abroad. It seems unlikely that prevailing driving habits will change unless the world economy buckles, oil prices rise further, or both.
The last time oil was at a hundred bucks, Tesla was a novel start-up. Today, automakers around the world are getting ready to introduce dozens of competitive electric vehicle (EV) offerings at lower prices. In an era of rising oil prices, EV interest and adoption will accelerate, no doubt. Yet, as discussed in my previous columns the entrenched numbers are beyond comprehension. The world’s 1.2 billion combustion-engine-powered vehicle fleet is still growing at almost 50 million net new vehicles each year, because of this EV penetration will be inconsequential in denting oil dependency for at least a decade.
Finally, the International Energy Agency recently trimmed its 2018 annual oil demand outlook from a staggering 1.5 MMB/d expansion (anything over a million per year is a lot by historical standards), down to 1.4 MMB/d. That’s only a 6% drop in growth following a 40% increase in product price. In economists’ parlance, “that’s not very elastic.”
All of which means that it’s going to take a lot more than higher fuel prices—induced either by markets or carbon taxation— to get the world off of its 100-million-barrel-a-day oil fixation.