Coronavirus, oil prices, gas prices, and climate change: What's the connection?

By Alexandre Joly, Manager - Energy Division As is often the case in times of crisis, the price of a barrel of crude oil on the world market fluctuates wildly. The coronavirus crisis is no exception to the rule. The price has been on a downward trend since the crisis began in China in late 2019, falling from From $70 to $55 in 2 months ; it then plummeted sharply to nearly $20 at the end of March, as the spread accelerates in Europe and the United States.

A drop in oil prices means lower prices at the pump. Not immediately, it takes a few weeks for this to have an effect—the time it takes for a barrel of oil to enter the refining process and reach gas stations. As a result, we see a decrease the price at the pump starting in mid-January, which continues to rise until it reaches -35% at the end of March, or 20 centimes.

Why aren't gas prices at the pump falling as sharply as the price of a barrel of crude oil? Beyond the time it takes for price changes to be passed on, it is the the structure of the price at the pump, which explains that the relationship between the two is not strictly proportional. In fact, a barrel contains 159 liters. Let's start with a $70 per barrel that is, 44 cents per liter, which comes to 40 euro cents using an exchange rate of 1.1 $/€. For a price at the pump of 1.5€ including tax, The purchase cost per barrel accounts for only 27% ; the remainder consists of taxes (60%) and refining and distribution costs (13%).

Let's take a closer look at these 40 centimes (27%), which corresponds to a price of $70 per barrel just as it was at the start of the crisis in January. Late March, the price at the pump has decreased by 20 centimes due to the drop in oil prices. The price paid at the pump for a barrel has therefore been cut in half, dropping to 20 centimes (40–20), equivalent to $35 per barrel—also halved. So we're back to the price per barrel from two weeks ago ; which makes sense given the reverberation time.

What lessons can we learn from the climate crises on the horizon?

Let's take another look at taxes and Let's focus on the TICPE, the Domestic Consumption Tax on Energy Products. Like other energy sources subject to this same category of taxes (TIC), the TICPE applies to petroleum products and biofuels. It gained prominence during the oil crises of the 1970s. In fact, the objective was then raise fuel prices to encourage people to reduce their consumption by making other alternatives more cost-effective. France is far from being the only country to have sought to strengthen its energy independence in this way. In addition, this tax has recently come to include the CCE, the Climate and Energy Contribution, also known as “ "Carbon Tax". It accounts for 8% of the price at the pump, or About 10 centimes today. The amount has been frozen since the Yellow Vests movement and stands at 45€ per metric ton of CO2. Let's take a step back. The coronavirus crisis, like all other crises, brings about rapid and unpredictable jolts, whether up or down, of 20 to 30 centimes in the prices at the pump that each and every one of us pays. And that's exactly the problem, We experience them without understanding or anticipating them. Yet there is one crisis we can clearly see coming: climate change. In fact, we should be talking about a chain of crises—nothing like a single, severe crisis from which we emerge a few years later with the same economic system we had before the crisis. Whether it’s a logistical breakdown triggered by record-breaking flooding or a million climate migrants fleeing unprecedented droughts, the upheavals on the horizon will be numerous and frequent. Therefore, provided a robust framework is in place, accept a predictable carbon tax, If the amount were comparable to these fluctuations, wouldn't that be the lesser of two evils? How can we stop passively enduring these shocks and actively pursue an ambitious climate resilience policy?

Yes to a carbon tax, but not just any way.

The carbon tax is not not THE solutionbut It seems to be a relatively simple easy to set up and use understandable through the price signal we are all familiar with. Nevertheless, its current setup must be deeply improved to enable its acceptancesocietal. Here are a few ideas—by no means an exhaustive list:

• Social Justice: This was one of the first criticisms leveled by the Yellow Vests. The carbon tax could go into a “common fund” that would be redistributed in part due to the the most disadvantaged households through this tax. It should also help to reduce our dependence to gasoline and at the diesel through the development of low-carbon transportation infrastructure, shorter logistics routes, and less sprawling urban development.
• Transparency: The total amount collected from this tax, as well as how it is used, could be made known to everyone. Nothing would prevent to inform each year from the portion that is redistributed for social purposes, from the portion that finance the energy transition, etc.
• Long-term predictability: The upward trend in gas prices could be regulated by law through a "floating" carbon tax. The amount of the tax could then change depending on in particular the fluctuations in global oil prices to ensure a stable final price. For example, if the price per barrel rises from $70 to $105 in one month, instead of raising the price at the pump by 20 cents, we could reduce the carbon tax by 20 cents to keep the price at the pump stable; and vice versa.

Let's hope that the stimulus plans, post-coronavirus, announced by various governments will be actual "Green New Deals," and also addressing the most recent violations mentioned.

Notes:

• We use Brent as a benchmark for oil prices, as other prices follow similar trends.
• The TICPE has changed its name several times since its founding.