French truckers and British motorists must remember the basic laws of economics

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The Independent Online

There is nothing like an oil-price crisis for reminding people of some basic and uncomfortable laws of economics. When demand exceeds supply, the price of a commodity tends to rise. For the past eight years, the world economy (apart from parts of the western Pacific littoral from Japan to Indonesia) has been booming, and economic growth in oil-based economies increases the demand for oil.

There is nothing like an oil-price crisis for reminding people of some basic and uncomfortable laws of economics. When demand exceeds supply, the price of a commodity tends to rise. For the past eight years, the world economy (apart from parts of the western Pacific littoral from Japan to Indonesia) has been booming, and economic growth in oil-based economies increases the demand for oil.

The second basic law of economics is that when the price of something rises, consumers get cross and blame wickedness or greed. Just because a large part of the price of petrol or diesel is tax, the French farmers, truckers, taxi-drivers and fishermen blame their government and demand tax cuts (or, in the case of fishermen, whose diesel is untaxed, subsidies).

We British, who like to think we are a bit more sophisticated about these things, tend to mock the ignorance of the modern Continental peasantry. Our own "Dump the Pump" protest fizzled, making several tabloid newspapers look foolish. Perhaps we are wise enough to know that tax cuts (or subsidies) will have to be made up elsewhere, and grudgingly accept that if things have to be heavily taxed, there might as well be an environmental rationale for it.

We think we know, too, that the real villain of the economics seminar is the cartel of the big oil-producing countries, Opec, which tries to maintain high prices by refusing to increase production. Except that we are just as wrong about that as any French farmer is about their government.

Opec is not the power it once was, and it was only that for a brief period in the early Seventies. Since then, the main feature of its attempts to keep the price of oil high has been how unsuccessful they have been.

This is where a third law of economics comes into play. If the price rises, producers have a greater incentive to increase production. Opec will always be vulnerable to one of its number breaking ranks and taking short-term profits rather than sharing them. What is more, several large producers, including Britain (currently bringing marginal North Sea oilfields back into production), Norway, Mexico and Russia, are not members.

The likelihood is, therefore, that - after a time lag - oil production will increase and the price will come down again.

This may be "good news for motorists" and a relief for businesses facing cripplingly high transport costs, but there is no escaping the underlying fact that much higher oil prices would be good news for the sustainability of life on the planet. Burning oil and gas is already changing the Earth's climate, and the best means of restraining consumption is by raising the price. Ideally, this should be done by taxation, rather than by siphoning monopoly profits into a cartel of exporting states.

This is an infinitely harder task than parking tractors across the Channel Tunnel entrance, because it means persuading the US to raise tax from the current 8.5p per litre towards the British 62p per litre. It means taxing aviation fuel. It means a global effort to co-ordinate tax policy in order to use market forces to shift the world economy from high energy use to low.

The laws of supply and demand suggest that the price of oil will come down in the next few years, but the needs of the environment suggest it should go up further.

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