Government regulated theft: Fuel


No one is ignorant (hopefully) about the exorbitant prices of transportation fuels, but what exactly is going on in the background? As with any commodity, you wouldn't expect a constant price across countries (you have to take into account transportation costs, the local economy and many other factors) but the differences are just outstanding, ranging (per litre) from $0.02 (Venezuela) to $2+ (Norway) (May 2015). How is this even possible with a common, global "market" price for fuel as a commodity? It's all due to restrictions/manipulations by governments around the world.   

    While some countries actually subsidize gasoline, others impose a sometimes grossly disproportionate (to the local economy) tax. Some examples of the latter are Greece, Portugal and Ireland (or three out of four "PIGS" in Europe) which all had -and still have- major financial problems during the last economic recession. All three hold places in the top 21 of most expensive for fuel in the world.  For comparison, the average wage in Norway is about 300% that of Portugal, yet fuel is only 20% more "expensive" in Norway. Before you jump up, you cannot use the argument that the higher tax leads to better public services since, at least for the specific examples noted, the exact opposite applies. So what is really going on? 

  1. Commodity price controlled by "law" (i.e. force) - Check

  2. Commodity in question is "practically" a necessity but not "technically" (i.e. can go ball to the wall with tax with minimal political losses) - Check

  3. Arbitrage and black market opportunities that rise due to point 1 have to be combated by extra police work (thus wasting government money in the long run...) - Check

  4. Income most likely used to cover shortcomings of government - Check

  5. Industry has high leverage on government - Check*

    As the title already spoiled, it is yet another case of government regulated theft. Contrary to tobacco, alcohol and other "taxed vices", this tax is stupendously insidious. Most of the transportation done is for commute to work, where you generate income for which you get doubly taxed already (when getting payed and when buying anything). So at the end of the day you get unfairly -as the commodity is not fairly traded in an open market- taxed for a necessity to be able to go to work; where you will be unfairly taxed -due to idiotic tax scales- on your income so you can pay tax for everything you buy. In short, most governments have a nice triple dip system in place.

    How much are you actually paying in tax? In the UK this figure pops up as 60% of the pump price and for US 18%, both based on official reports. I will argue that this figure if not flat out a lie, is engineered to misinform the masses. Whenever the government messes with prices of "not exactly necessities" you may run into scenarios where it is actually, "technically", a necessity, such is the case here. For example: farm equipment, power generators and some types of heating which all of course use the same type of fuel as diesel cars. So here lies the problem, how can you charge such exotic prices for heating? You will lose the elections for sure. The "brilliant" solution is to sell the same thing at two prices depending on the purpose and not what it actually is, with mechanisms in place to be able to catch "tax evaders". In this case the "mechanism" is dyeing the "tax relaxed" fuel with red paint. You can even look up the chemical compositions of the fuels, they are identical.

    I used the term tax relaxed on purpose, as the heating diesel (a.k.a. off road diesel/red diesel) still includes VAT at the very least. In the UK, the "two" fuels have a huge (normal diesel is 2.3 times the cost of red diesel) difference in retail price, difference which we know is 100% tax from the above. Additionally, the importer still pays fuel duty to the government of about £0.11 per litre (cost passed on to the customer of course), therefore:

( MarketPrice + 0.11 ) * 1.2  * 2.32 = RetailPrice  

[with 20% vat in the UK hence the multiplication with 1.2]

    Plugging in the current retail price of 1 litre diesel in the UK (120 pence), we get that the amount the importer gets per litre is about 43 pence. In short, for each litre of "road use" diesel in the UK you currently pay almost 65% of the price in taxes alone, or £650 per year (based on averages published for miles traveled and cost per litre in diesel fuel). To reiterate, out of average £1000 spent on diesel fuel, £650 is just the tax.

The pragmatist approach

    While you have the cliche answers in your head it is not obvious how you can (legally) reduce this tax overhead in the best way(s). In order of benefit/cost , these are:

  1. Use public transport in big cities, it tends to be faster and you can use the time productively. Just the tax savings alone can cover your transportation costs.

  2. Reduce your commute time by changing when you commute (i.e. go earlier/later to work). Contrary to popular belief a better measure of fuel consumption is the integral of number of engine revolutions over time and not distance traveled.

  3. Reduce you commute distance by moving closer to work, you might be able to cover the rent difference and even get extra free time.

  4. Learn how to drive efficiently, this is better achieved with a manual transmission car. Google is your friend. Up to 50% Increase in efficiency depending on how inefficiently you are driving now.

  5. Get a more efficient car, do not fall for the electric car trap (more info on this in the future). There are many 60+ mpg cars out there.


- The Pragmatist

*Fun fact: The "fine" imposed on British Petroleum (BP) for the gulf of Mexico oil spill of 2010 was less that the yearly profit for the company and even still had profit in 2010. Actually, 2011 was the most (gross) profitable year for BP of the last 10 years (2006-2015).