(Bloomberg) -- Soaring gasoline prices around the world are forcing governments to slash fuel taxes to appease drivers, a move that may instead support demand and exacerbate the tightness across markets.
The cost of motor fuel, which was high even before Russia's invasion of Ukraine, has been turbocharged as sanctions caused buyers to shun shipments from the OPEC+ producer. While governments acted to curb inflation, their efforts could shield consumers from higher expenses and undermine the International Energy Agency's call for oil usage to evolve in a more sustainable way.
READ: IEA Urges Fuel-Saving Steps With Russia Crisis Set to Worsen
Retail gasoline prices have hit records everywhere from the U.S. to the U.K. and Australia, while the cost of motor fuel in Japan is at the highest in more than 13 years. In India's financial capital of Mumbai, prices are up close to 50% since the start of the pandemic. Diesel has also rallied to record levels in some regions.
Russia's invasion of Ukraine month roiled global commodity markets, triggering widespread condemnation and prompting a rush for alternative supplies of crude and fuels. Oil futures have jumped above $100 a barrel, with the global benchmark Brent nearing $140 at one point.
Rising inflation is a major challenge for central banks and governments seeking to encourage economic growth after the pandemic. Several U.S. states have temporarily rolled back their gasoline taxes and the Biden administration is considering backing the move at a federal level. France, the Netherlands, Ireland, Portugal and Brazil are also taking action.
Japan maximized the subsidy provided to oil refiners, even though the aid money given so far has done little to cool pump prices. South Korea extended fuel-tax cuts by three months through the end of July, and Vietnam approved a reduction in environmental protection tax for fuels including gasoline. New Zealand has slashed fuel taxes for three months and Australia may cut taxes on gasoline in this month's budget, ahead of the federal election this year.
Tax cuts or any increase in subsidies will help consumers, said Sandy Kwa, senior analyst at consultancy firm FGE. “Although some countries' government absorb the higher costs, it is unlikely to be financially viable in the longer term.”
Changing Habits
Pakistan is risking its $6 billion bailout program from the International Monetary Fund by reducing fuel prices and promising to not increase them until at least June. In the Philippines, the government is resisting a relief on excise tax fearing the impact it will have on revenue.
A change in driving habits might not be far off for some. A survey from the U.S. auto club AAA showed that Americans will adjust their lifestyle if pump prices were to reach $5 a gallon, including carpooling and cutting dining out. Average retail prices are less than $1 from that threshold.
Change is harder in other regions. Cheap motorcycles form the backbone of mobility across a lot of Asian nations from India to Indonesia, and public transport can often be limited. It may mean fewer trips for some where possible should gasoline prices continue to remain high.
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