Do not raise oil prices

Published October 23rd, 2000 - 02:00 GMT

Oil prices have been on the rise for quite some time now. A few weeks ago, declarations by the Iraqi leadership of Kuwaiti foul play caused the price to jump past $38 per barrel and the euro and major indexes of US, Europe and Asia to fall, with the prospect of slow economic growth looming behind inflated oil prices.  


OPEC, the Organisation of Petroleum Exporting Countries, became again, as in the seventies, the focus of the wrath of many in the West. The claim was that OPEC caused the rise in oil prices, in spite of promises reiterated by Saudi Arabia and OPEC to raise production in order to lower prices.  


Now, with world oil prices continuing to climb as regional instability threatens to escalate, we have to ask the question: Should the government raise fuel prices in the Kingdom?  


Many, better informed, sophisticated consumers would argue that governments have played a major role in keeping fuel prices high; OPEC is not entirely to blame.  


The governments of many countries, including those of the leading industrial states, were the ones that gained the most from oil consumption. In Britain, taxes on petrol comprise almost 75 percent of the cost of unleaded fuel to the consumer; OPEC only gets less than 25 percent of the total bill. Thus, the British government takes in approximately US$40 billion in taxes from oil alone. Other countries, including the US and France have similar policies.  


Even Jordan, which receives oil from Iraq at US$5 per barrel less than world prices and receives a significant portion as aid, has priced oil at prices that exceed cost, creating an additional, market-distorting source of revenue for the government and indirectly taxing industry and consumer.  


Therefore, it could be argued that in Jordan, as in the rest of the world, governments which have found in oil a source of revenue, should share with the consumer the increased cost burden and not raise oil prices.  


Furthermore, governments that are afraid of the negative impact of producer and consumer pessimism on their economies should come out and proclaim their intent to lower their take of the price gauge to maintain prices at past levels, instead of placing the blame on OPEC.  


The IMF and the World Bank, traditionally concerned with growth and sustainable development, should understand that raising oil prices could drive the Jordanian economy, which is presently suffering from a low growth rate partially because of a restrictive fiscal policy, deeper into recession and inflation-stagflation, a composite state of misery comprised of high unemployment and high inflation rates.  


The most optimistic growth rate announced for this year for Jordan was 3 percent (I would vote for a lower growth rate such as under 2 percent as the more factual) which is still below the growth rate of the population. In other words, there is no room for celebration yet — oil prices must remain at their old levels.  


To look at the situation in another way, when Jordan enjoyed lower fuel costs the savings were never passed on to the consumer. Since oil is a commodity that is used by every segment of the economy, the act of not passing the savings on to the consumer is equivalent to a tax on consumption.  


Therefore, now that the price has risen worldwide, it is time to lower the tax in Jordan and maintain old prices. Otherwise, income will be transferred again, needlessly, from the consumer to the coffers of government.  


If the policy makers have a strong case for raising oil prices, they should prove it with facts and figures before any hikes, and their policies should be announced well before implementation to allow the market to adjust rationally, not leaving room for negative speculation and a cold winter. 


( Jordan Times )  

By Yusuf Mansur  



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