Monday, December 22, 2008

Automatic Stimulation?

The average price of a litre of petrol in Ireland has fallen below 1 euro for the first time since the the start of 2005.

In the middle of this year the price per litre peaked at an average of €1.34. In the space of a few weeks the price has dropped dramatically. This follows the pattern in commodity markets where the price of a barrel of oil peaked at $147 but has recently been below $40.

AA Ireland reports (via that "if you're putting 40 litres of petrol in your car, you are now spending €40.40 per tank instead of €53.60 - a significant saving." This is indeed a significant saving. But what is the saving for the economy as a whole?

In a full year Ireland consumes about 2 billion litres of petrol. Let's assume that the average price at the pump in 2008 was €1.20 (about right) and that the average price in 2009 will be €1.00. (as good as guess as any if the price changes follow a random walk).

With a consumption of 2 billion litres this means an aggregate saving of €400 million! That is €400 million extra that Irish consumers have to spend on other goods and services that would otherwise have (mostly) been spent on importing oil.

And there's more! The 2009 price includes an additional 8c per litre excise duty that only applied since the middle of October in 2008. So not only will the consumers have to spend less on petrol, the Exchequer will actually collect more. The increase in excise duty will bring in about an extra €160 million for the government. This gives a total gain of €560 million.

If the price continues to fall consumers will gain €100 million for every additional 5c decrease in the price per litre.

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