Fuel Should be More Expensive

The Current Situation

Before the US and Israel started attacking Iran at the end of February the petrol prices in Australia were around $1.70/L, which for American readers is roughly equivalent to $US4.64/Gal. By the 11th of March the prices were around $2.19/L. Over the same time period Diesel went from around $1.77/L to $2.40/L. The 11th of March prices weren’t necessarily unreasonable prices. In mid March it was reasonable to expect that the US would stop doing such ridiculously stupid things and make a deal with Iran to allow oil to be transported.

But every time you think there’s a limit to Trump’s stupidity (and the incompetence of people around him who don’t point him in the right direction) they do something worse. So now we have the Strait of Hormuz almost entirely closed cutting off oil from Kuwait, Qatar, and UAE. The Bab al-Mandab Strait is closed to Saudi linked ships and the Saudi East-West pipeline is closed so once the Yanbu storage tanks are empty there won’t be much if any oil from Saudi Arabia for some time. So world oil supplies will be significantly reduced for a long time.

Currently the petrol prices in Melbourne are around $2.30/L and Diesel prices around $2.70/L, not much more expensive than it was in March in spite of all the extra problems both militarily and diplomatically since then. Those prices have been steady for over a month.

The blockade of the Strait of Hormuz could be ended fairly quickly and there are reports that a lot of the oil that used to go through it is being re-routed. The damaged infrastructure throughout the middle east can’t be fixed in a hurry. The Bab al-Mandab Strait probably can’t be opened quickly as the Houthis probably don’t have a centralised command structure that allows someone to order a ceasefire and have it stick. So we can expect a massive reduction in world oil supplies for a while, which given the way the US is going could be at least until after the mid-term elections (November this year) and possibly until after the 2028 elections. After that oil production will be reduced for another year or two to rebuild infrastructure.

The Problem

When supply can’t meet demand there are three options. Supply can be rationed, demand can be decreased by increasing the prices, or it can be used up and we run out. Running out of fuel is a really bad option as fuel is needed for producing and transporting food and for most things that are important to a society.

Governments of first world countries seem unable to deal with the situation properly. Dealing with it properly requires either rationing or increasing the prices. Instead governments have been more interested in artificially keeping the prices down.

Currently in Australia and most countries a significant portion of public transport depends on Diesel fuel. Diesel is needed for most buses and for long distance trains. Most taxis run on petrol. As far as I know all emergency service vehicles run on Diesel or petrol as well as most military vehicles. So things will get really bad quickly if fuel runs out entirely. It’s not just personal cars that are affected.

We aren’t going to get the majority of tractors converted to electric power any time soon. Google search results suggest that tractors last an average of about 25 years but casual observation of working equipment on farms suggests a longer life than that is common. Some tractors could be retrofitted to be electric but many will end up being scrapped as part of a conversion while farmers are already having financial problems. It would probably be optimistic to expect that half the tractor use could be done with electric tractors in 10 years time unless there are significant government subsidies. To get the farming and food production industries adapted for electric operation in a few years would be possible but it would take a level of national mobilisation that only happens during wartime.

What We Need

As a long term solution we need to have more electric vehicles in every category. We need electricity for all train lines to replace Diesel locomotives. We need better trains between cities to reduce the need for aeroplanes, electric aeroplanes are being developed but we aren’t there yet. We need all essential services to be run with electric vehicles including farming, food transport, emergency services, and everything related to the medical system (including personal cars for healthcare workers). We also need mining vehicles powered by electricity so we can have the entire industrial system running without fuel. None of this is going to happen in time for this crisis.

Electric buses are being introduced in Australia and many taxis are electric. The recent significant increase in the use of electric cars probably includes a reasonable portion of healthcare workers and other essential workers. This gives us the potential to survive fairly severe reductions in the fuel supply without everything collapsing. But we have a significant lack in electric police cars and in electric trucks for food delivery.

In the short term we need to significantly reduce the use of fuels, there is no other way to keep the food supply and other essential parts of society working. We could try rationing but I think that should be a last resort. The news reports of a de-facto petrol rationing system in Crimea and parts of Russia are not positive, significant resources are wasted in long queues for petrol and there is public disorder caused by disputes about position in the queues. The level of sanity in the population seems to have dropped significantly since the fuel crisis of 1979, any fuel rationing that is implemented now would get the same sort of opposition from Qanon types as Covid vaccines and lockdowns did in recent times.

So the best viable option seems to be to reduce demand by increasing prices. $2.30/L as a common price with occasional spikes of $2.50/L isn’t sufficient to do that. If the price increased to $3.50/L, twice what it used to be (equivalent to $9.50/gallon for Americans) then it would provide a real incentive for people to reduce fuel use. That would have to be combined with the type of remote work allowances that were in place when Covid19 was first spreading. But I think that all politicians are too weak to do such things. The media have demonstrated that nowadays the best we can expect is that they will treat both sides as equal even when facts clearly support one side, so we can’t expect the media to report on impending fuel shortages and demand policy changes to address them.

We should have higher taxes on fuel that will continue past the resolution of the current crisis caused by the attacks on Iran to provide incentives for the purchase of electric cars and for manufacturers to make more fuel efficient cars. Currently people are basing car ownership decisions on the expectation that petrol will go back to something under $2/L and we need to have a government guarantee that it won’t happen.

People always complain about poor people who can’t afford to drive if petrol is expensive but that could be addressed by increasing the minimum wage and social security payments. But a large portion of the people who complain about the hardship poor people may face when fuel prices are discussed are against increasing the minimum wage so I don’t think they are being honest.

Another common complaint is about the difficulty driving long distances in rural Australia when there isn’t sufficient charging infrastructure for electric cars and therefore rural people including farmers getting hit by high prices of fuel. There could be a rebate scheme for farmers etc, government subsidies for farmers is nothing new.

What Will Happen

I expect the governments of most first world countries to try to keep fuel prices low and do very little to try and decrease demand. China will probably do some things to reduce fuel use and being the world’s largest oil importer this will make a difference, but not as much as we need.

A related problem is that a lot of fertiliser is produced from petrochemicals and closing the strait of Hormuz cut off a significant portion of the world fertiliser supply. First world countries will outbid developing countries for fertiliser and fuel. Starvation in developing countries probably won’t get much news coverage until it leads to war.

This is not going to go well, it could be addressed if we had braver politicians and more honest media companies but that’s not the way things are going.