Generally it’s an accepted view that it is good intentions that pave the road to hell. Doubtless, the French government had the very best of intentions when it followed through on an election promise and announced it would ride to the aid of hard-pressed motorists by hacking a full six euro cents off the cost of road fuels.
In the spirit of liberty, equality and fraternity, the government was not alone in making sacrifices to ensure the cut came through. France’s treasury accepted a three cent cut in fuel duty, with the country’s retailers chipping in the other three cents.
The one snag is that it doesn’t seem to have worked.
According to data from France’s petroleum body, UFIP, and in common with a trend seen across other parts of Europe, road fuel consumption is in decline, a decline which is starting to border on free fall. As economies continue to struggle across Europe, was the cut too little, too late?
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Ok, so the measure is limited to three months — broadly September, October and November 2012 — but it sent out a potent message to l’automobiliste that the government understands the pressures on the motorist and perhaps signals the end of an era where the average driver has been regarded as a cash cow for government coffers.
For France’s government the saga is a double blow, as declining road fuel sales mean lower revenues straight away, with the three cent tax cut compounding that revenue loss.
Extrapolating basic numbers is a tricky exercise, so bear with me and reach for your calculator. But in September, the first full month the price reduction came into force, retail volumes shrank by some 5% on diesel and 11% on gasoline.
Sales of diesel were 3,284,311 cubic meters in September, down from 3,462,372 cubes in the same month of 2011 and the lowest volume of September diesel sales in at least five years, according to the data.
September’s total diesel volume, if I’m not very much mistaken, equates to something in the region of 2.8 million mt, or 20.6 million barrels. To take it to the extreme, that would be 868 million gallons, or 3.2 billion liters. At three cents per liter off, well, you’re looking at a loss straight away of 96 million euro (around $125 million) on that volume, never mind the loss of *wince* 178 million fewer liters burned this year versus last September.
It’s a sizeable loss in economic terms, and the net result in retail prices has been less than impressive. Arguably, the heavier loss in gasoline consumption raises the prospect of a more pronounced hit to France’s finances since the grade is taxed at a higher rate than diesel, a key factor in driving diesel into the dominant position it enjoys in the country.
Retail prices across much of the European region surged back into record territory through April, as sovereign debt fears eroded the euro’s value on international currency markets and Dated Brent crude moved back through the $125/b level. That move formed the backdrop to France’s presidential election, and a similar move spurred government action as prices again started creeping higher through August.
France’s finance minister Pierre Moscovici said in late August that the government and the oil industry would jointly cut fuel prices for three months to alleviate the impact of the price increase. But timing is everything in these situations and the three months selected to benefit from the move coincided with the typical refiner maintenance period of late September, October and early November.
Bad luck on the part of the French government in many regards, as the announcement of the price cut came as significant refining capacity in and around France entered a hefty schedule of maintenance.
That brought out support across markets for both of the road fuels, as Europe’s diesel deficit grew dramatically. In the Platts Market on Close assessment process, France’s oil major Total hoovered up more than a million tons of diesel over the course of August and September alone.
The diesel crack – the measure of the value of an oil product versus the crude that it takes to make it — rose doggedly from early August through to October, peaking at $26.72/b on September 28 according to Platts data, and with it the price steadily rose too.
For gasoline, prices climbed to $1,163.25/mt by September 6, the highest outright price since April 16, according to Platts data, with the price climbing even as crude values were moving in the opposite direction.
Diesel prices also found support on the back of the maintenance period, with the price of a delivered cargo into the French port of Le Havre surging to a high of $1,069.50/mt on October 11, the highest outright price since March 19, according to Platts data.
The third part of the equation — the euro itself — actually found some stability through the later period, providing some insulation to the upward move, but the best intentions of the fuel price cut had already been overwhelmed.
Of course, in focusing on UFIP’s September figures, we run the risk of overlooking the bigger picture: that throughout the year France’s retail volumes are down by some 620,000 cubic meters on 2011 (in the region of 620 million liters), with the heaviest falls in sales volume coinciding with the key peak price moments around April and September.
And France isn’t alone in this; the UK saw a fall in retail volumes that equated to something in the region of 500 million liters through the second quarter of 2012, according to the Department of Energy and Climate Change. Even Germany — Europe’s economic powerhouse — saw diesel sales slip 2.4% in May (although overall 2012 has seen German demand on the growth trail again). Italy, meanwhile, that bastion of the supercar, recently reported that more bikes were being sold in the country than cars. Heck, one modestly unhinged Austrian is even breaking the sound barrier without using oil.
For governments it suggests that the ability to rely on the motorist as an almost bottomless resource for tax revenues is coming to an end. The UK too has been forced into abandoning a series of proposed duty increases, bringing to a halt a rolling schedule of increases that spans several years and various governments.
It may be a blow to France’s revenue generation, but in some ways it’s also a victory. Teasing, prizing and ultimately bludgeoning drivers out of their cars was, at least for some European nations, the stated intention for levying such a burden of duty and tax on road fuels in the first place. The economic situation combined with creeping crude prices has proved the tipping point in that weaning process.
But with much of Europe still struggling with the sovereign debt crisis, can governments realistically shore up their balances without leaning on the road user?