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As fuel prices rise to record highs, governments look for solutions

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© Reuters. FILE PHOTO: A person uses a petrol pump, as the price of petrol rises, in Lisbon, Portugal, March 7, 2022. Picture taken March 7, 2022. REUTERS/Pedro Nunes

By Bozorgmehr Sharafedin, Stephanie Kelly and Patricia Vicente  Rua

LONDON (Reuters) – Retail gasoline and diesel prices soared to record highs in many countries across the world this week, prompting governments from Brazil to France to consider pumping up subsidies or trimming taxes to shield consumers from the financial strain.

The moves reflect the economic and political risks governments see in the current energy spike, which has been driven by a rebound in fuel demand since the darkest days of the coronavirus pandemic and supply disruptions in the wake of Russia’s invasion of Ukraine.

If prices keep rising – as many analysts expect – they could take a bite out of economic growth, force lower consumption, and in some cases trigger political unrest. In past years, rising fuel prices have caused deadly protests in countries including Kazakhstan, Iran and Zimbabwe.

“Sky-high energy prices for a prolonged period of time, risks of energy rationing, and ultimately a recession are growing by the day,” Livia Gallarati, oil markets analyst at Energy Aspects told the Reuters Global Markets Forum.

Global benchmark oil prices were trading around $115 a barrel on Thursday, up from around $80 a barrel at the end of last year.

The United States on Tuesday imposed a ban on oil imports from Russia, the world’s third biggest producer, as retaliation for Moscow’s invasion of Ukraine, and Britain also said it would phase them out.

Analysts at JP Morgan Chase (NYSE:JPM) & Co and Bank of America (NYSE:BAC) have predicted disruptions to Russian oil flows could push oil prices to $185 to $200 per barrel.

In the United States, the average price for gasoline has already reached a record $4.3 per gallon this week. Pump prices could rise to around $5 per gallon in time for the Memorial Day holiday in late May, when the country’s summer driving season begins to ramp up, said John Kilduff, partner at Again Capital in New York.

Devin Gladden, manager for federal affairs for the American Automobile Association, said if oil goes as high as $200 per barrel, gasoline could reach $6-$7 per gallon.

Many U.S. motorists are considering ways to cut other expenses to afford to pay for fuel.

In Britain, the average price of unleaded petrol at the pump rose to 1.58 pounds per litre, while diesel hit 1.65 pounds per litre, both record highs, data from automotive services firm RAC unit Fuel Watch showed.

Australia’s gasoline prices are also at record highs, just under A$2 per litre.

SHIELDING CONSUMERS

The administration of U.S. President Joe Biden has sought to combat rising consumer energy costs in the U.S and abroad by orchestrating the release of millions of barrels of crude oil from emergency stockpiles in concert with other consumer nations.

But Washington has so far declined to intervene directly at the retail pumps with tax holidays or direct subsidies.

Not so elsewhere.

Ireland said on Wednesday it will cut the excise duty on petrol and diesel until the end of August to ease the burden of rapidly increasing gasoline prices.

Portugal will also lower the special tax levied on fuels from Friday to tackle an unprecedented spike in energy prices.

Over the weekend, many people across the country had rushed to gas stations to fill up tanks, expecting a further increase in prices that have already surpassed 2 euros per litre.

Other countries are planning similar moves.

In France, with the presidential election only a month away, President Emmanuel Macron, said his government will soon unveil measures to help households dealing with high fuel prices, and pointed out it had already spent 20 billion euros a year to moderate gasoline and power costs.

“I won’t let anyone say the government hasn’t done anything,” Macron said during a campaign event on Monday.

Brazil’s government is also considering a new diesel and gasoline subsidy programme to help consumers, newspaper O Estado de S. Paulo reported this week.

The Czech government will scrap mandatory blending of bio-components into fuels and abolish a road tax to counter soaring prices.

RAC fuel spokesman Simon Williams, meanwhile, called on the UK government to cut the nation’s Value Added Tax to save homes and businesses from financial pain.

“A cut to 15% would save drivers 6.5p on petrol based on the current average… it doesn’t seem fair that the government’s coffers should benefit from the hike in the oil price while drivers suffer,” he told Reuters.

A UK Government spokesperson said the government will do everything it can to mitigate high prices and help people.

“The £12 billion in support that we’ve already announced to help with the cost of living includes a freeze on fuel duty for the twelfth year in a row – the longest sustained freeze in British history,” the spokesperson told Reuters.

In the meantime, high prices for fuel could force some changes to consumer behaviour, said AMP Chief Economist Shane Oliver.

Those changes could range from reduced driving through measures like carpooling or working from home, to reduced spending on other goods and services, or by accelerating a shift to more efficient or all-electric vehicles, according to Oliver and AAA’s Gladden.

Goldman Sachs (NYSE:GS) said it expects demand to drop by 1 million barrels per day – or almost 1% of global consumption – if prices rally to $150 barrels.  

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