Comment: lower fuel taxes won't end pain at the pumps

With petrol prices rising ever higher and the fuel strike causing disruption across Britain, this may be the last thing anyone wants to hear. But the most commonly suggested remedy to the soaring cost of driving - a cut in fuel taxes - is a terrible idea.

Whatever the political soul-searching - Gordon Brown has called the oil price "the most worrying situation in the world" - there are few quick fixes available to ease the pain for drivers. Yesterday the price of crude hit a new record of almost $140 a barrel.

Mr Brown talks of browbeating Saudi Arabia into pumping more oil and is off to Jeddah this weekend to do just that. This is not totally far-fetched. Last year, the biggest decrease in the world's oil supply came not from declining production in the North Sea but from the Saudis deliberately reducing their output to prop up the price, which was falling at the time.

They have since restored some, but not all, of the lost production and have promised to raise their output further next month. The Saudi oil minister has invited big oil-consuming countries to participate in a meeting this weekend to discuss the high price, during which the British delegation will doubtless make some polite enquiries about the missing barrels.

Other Opec members are also holding oil back from the market. Iran, for example, produces lots of oil that is relatively viscous and high in sulphur. That is expensive to refine, so buyers are not willing to pay as much for it. But Iran has balked at the sort of discounts they are demanding and has begun stockpiling the stuff on oil tankers instead. Eventually, presumably, it will have to give in and accept a lower price. For the world's drivers, it would help if that moment came sooner rather than later.

But Iran and most of the other members of Opec are not known for their sympathy with the West. Even if Saudi Arabia can be prevailed upon to open the taps, British drivers would remain at its mercy and that of other oil-rich states. If the oil price began to fall, it might change its tune again, as it did last year.

Other politicians think they can lower the price of petrol by cracking down on speculation. They believe that the investors who are buying up futures contracts in the hope that the price will rise are creating a self-fulfilling prophecy. There is now so much money chasing oil futures, the theory runs, that it is driving up the price.

But that is not how the futures markets work. The speculators are not trading real barrels; they are simply taking bets on the direction the price will move. The sums they are willing to pay for these "paper barrels" do not change the price of genuine crude any more than betting on a football match changes the outcome. In fact, all the finger-pointing is simply an indication of how impotent the Government is.

This brings us to the solution being demanded by many hauliers: lower taxes and, specifically, a further delay in the increase of 2p per litre in fuel tax planned for October.

Tax makes up almost 60 per cent of the cost of diesel in Britain, a far higher share than in most countries. The figure would be higher still if the Government had not delayed the planned increase in April. But motorists want more. In particular lorry drivers complain that they are suffering from unfair competition from foreign hauliers, who benefit from lower taxes on diesel in Europe.

It is true that diesel is more expensive in Britain than across the Channel. But that is not such a bad thing. For one thing, the tax dampens the effects of rising oil prices. In countries where fuel is only lightly taxed, the price of oil is the main component of the pump price. So over the past few years, as the price of oil has doubled, fuel prices have risen much faster in the rest of Europe than they have in Britain.

For example, the price of diesel in Greece rose by more than 60 per cent between January 2005 and April 2008, according to the European Commission, compared with an increase of less than 30 per cent in Britain. In America, where fuel is very lightly taxed, the difference is even more acute. Petrol prices are up by a third in the last year alone.

More importantly, heavy tax encourages drivers to buy more fuel-efficient vehicles. That makes life easier when the petrol price rises. Those who have passed up petrol-swilling Chelsea tractors, or better yet, opted for hybrids or electric cars, are thanking their lucky stars now. But there would be far fewer of them if it hadn't been for high fuel taxes. By giving drivers more of an interest in fuel economy, high taxes also give firms an incentive to come up with clever kit to save fuel or do away with the stuff altogether.

Inventors and entrepreneurs have lots of ideas about how to wean motorists off petrol and diesel. Most big car-makers are only a year or two away from rolling out a new generation of electric cars. There are still hopes that some bio-fuels might prove viable - especially those that do not rely on food crops such as corn and soybeans. A cut in fuel taxes would make life harder for the firms working on these new technologies and so delay the day when Britons can stop worrying about the oil price for good.

In other words, the high oil price will undermine itself in time. That is what happened during the oil shocks of the Seventies: drivers became much more sparing in their consumption just as the likes of BP and Shell went off and found more oil in places such as the North Sea, ushering in a 20-year period of low prices.

But those sorts of changes take years to come about. In the meantime, sadly, the adjustment will be painful. The least efficient hauliers probably will go out of business and drivers will suffer. The Government can and should help the hardest-hit, just as it has tried to lower heating and power bills for the poor.

Ministers will never find a cure for high fuel prices, because high fuel prices are not a disease. To strengthen the economy, protect the environment and preserve our security, Britain needs to consume less petrol and diesel. And the best way to make sure that happens is to keep fuel prices high.

Edward McBride is energy correspondent for The Economist.