High oil prices have re-kindled a long-running argument between the oil producing and oil consuming nations about the who is entitled to what revenues from the sale of a barrel of oil to the final consumer. With some European governments now taking up to 75% of the revenue from motor fuels in taxes, OPEC is calling again for a change in policy — supported this time by consumers who are demanding immediate reductions in oil taxes to compensate for high prices. However, there seems little prospect of a change in policy as high taxes on oil are part of a wider economic strategy to shift the burden of taxation away from income to consumption using “environmental” taxes as a key policy instrument.
Unfortunately for oil, it has been made to bear the brunt of the new tax policy as consumer governments effectively hi-jacked the existing tax regime, re-branded the already high rates of tax levied on motor fuels as “environmental” taxes, and boosted both fixed duties and VAT rates. Although a few countries have widened the tax base to include other fuels such as gas, coal and electricity, the burden of taxation remains disproportionately high on oil products and the transport sector in particular, with around 90% of the revenue from so-called environmental taxes in OECD countries still coming from taxes on motor fuels and motor vehicles.
Given the determination of most EU countries to maintain, and even increase, the levels of taxation on oil and other fuels as part of a wider economic and environmental agenda, there seems little prospect of any useful dialogue between the governments of the producing and consuming nations. If there is to be an effective dialogue, both sides need to recognise that the other has a case and be prepared to move in a direction that will, at least, improve the situation.
The governments of oil-producing countries, and OPEC in particular, need to recognise that consuming-country governments have a right to levy taxes on oil and other fuels as part of their wider economic and environmental policy and that these taxes should not be seen as part of the “economic” rent from oil production. The governments of oil-consuming countries, and the EU in particular, need to recognise that oil products are unfairly burdened with taxes in a way that seriously disadvantages oil relative to other fuels. If the primary justification for levying high taxes on oil is for environmental reasons, then the same principles should be applied to all fuels and the tax system should be restructured along more equitable lines so that oil is not unfairly disadvantaged. Unless both producer and consumer governments are prepared to make concessions on these key issues when they meet in Riyadh in November, there seems little prospect of a useful dialogue, since the two sides occupy entrenched positions from which they are reluctant to shift.