The Price of Fuel

With oil looking to head towards a figure of $USD150.00 per barrel, the world’s major economies are beginning to feel the pinch. Regular fiscal management has had to take a good hard look at what it can do to reign in inflation and prevent economies falling in to recession. You see, oil is fundamental to many chains of the economy. Farm equipment require diesel to run. Plastic containers, such as the humble milk bottle, need oil for manufacture. Delivery trucks require oil to deliver these milk bottles to the shops. Most people need fuel in the vehicles to go shopping for these milk bottles. When oil prices rise, basic food requirements become more expensive and so puts pressure on inflation.

For too long, many governments have ignored the fact that oil will at some point, run out. Some governments, such as the Germany & Switzerland have invested heavily in their public transport systems so that they rely less on oil dependent transport, such as aviation. It appears that the oil producers have failed to invest in the public transport infrastructure. The UK rail network still runs on 19th century technology, which makes it the butt of many a comedian’s jokes. The USA is still heavily dependent on aviation for long distance travel as is Australia.

In October 1981, the Australian government mooted the idea of a very fast train that would reduce the travel time between its east coast cities by 3-4 hours. Further discussions upgraded this proposal to a 3.5 hour rail ink to Melbourne. Some 17 years later, nothing had materialized. The initial cost of about $AUD4bn seems rather cheap in todays money, especially when the annual government surplus hovers around the $AUD20bn mark. Constant dithering and the failure to appreciate the resource demands of a galloping India and China makes the decision not to follow through with the VFT more puzzling. Interestingly, BHP was a willing participant on this project, which would have made the project viable. Qantas, Australians national flag carrier, became interested in the high speed rail link that would link Sydney with Canberra. Reducing flights between the two cities would allow the airline to redeploy equipment to other routes. Today, it would be a major cost saving on fuel as airlines seek to reduce the impact of high oil prices.

The Australian Government announced recently that it was providing Toyota with financial incentives to manufacture its hybrid cars in Australia. Audi have developed a vehicle that will use a very miserly amount of 3.8l per 100km. Assuming that economy, the Audi will use just 33.5 litres of fuel on a trip from Sydney to Melbourne! That equates to about $54 in cost. The Australian Government is on the right track in inducing the production of fuel efficient vehicles, but it can go one step further in reducing the taxes that are imposed highly efficient vehicles, such as the Audi A3 TDIe.

In the Car Rental industry, green cars will become more of an inventory option as the price of fuel begins to hit the hip pocket. Diesel cars will gain more demand due to their fuel efficiency. Hybrids are still considered a novelty and their usage is relatively low due to the high cost of hiring one. Companies like Europcar and Hertz continue to market green options through their website and also in print media. Corporate companies, such as Price Waterhouse Coopers, insist that on their car rental contracts that a green option must be made available. Car brokers, such as DriveAway Holidays, have begun to highlight which cars are considered green so that the customer can make more of an informed choice.

In simplistic terms, governments should be providing substantial incentives on reducing the dependency on oil. Reducing tax on super efficient cars, such as the Audi A3 TDie and all Hybrid cars will influence peoples car purchase. Providing financial support to rail infrastructure, such as the VFT in Australia will reduce the dependency on air travel. If all governments around the world proactively invested now, within 5 years, the demand for oil will drop. Will India and China actively seek to reduce their demand on global oil reserves? Who knows? But if they don’t, we are in for some very lean and recessionary years.