At the beginning of the month, the price of a full fuel tank in an average private car jumped to about NIS 380 – a new record in recent years. Were it not for the temporary excise tax reduction, which took effect in April, the price would have crossed the NIS 400 threshold per container.
This is a particularly worrying news for the largest employers in the economy, who provide their employees with an “unlimited fuel” benefit on their attached vehicle. The calculation is quite basic – according to CBS data, the annual travel of fleet vehicles in Israel is about 30,000 km, almost double that of private car owners. If we take into account the average real fuel consumption of about 12 km per liter, this means that each vehicle consumes 2,500 liters per year. This means that employers now pay, after the price increase, about NIS 19,300 per year for the fuel of each vehicle. NIS 4,500 per car compared to June last year.
In other words, an employer with a fleet of about a thousand vehicles currently pays only NIS 4.5 million a year for the fuel of its employees compared to the same period last year. All this on the assumption that the average price in the coming months will stabilize around the current continuum. Since there are around 220,000 attached vehicles in Israel, almost all of which enjoy a fuel benefit, the additional cost to employers is close to NIS 1 billion a year. This is a significant inflationary pressure factor, which is already changing the rules of the game in the car market, and the bad news is that this may only be the beginning of a continuing wave of price increases.
The beginning of a potential wave
Last week, several forecasts were published around the world regarding the price of oil and none of them was optimistic. The relatively moderate forecast was from the US Department of Energy (EIA), which estimates that the average price of a barrel of Brent oil will be “only” $ 107 this year. The EIA expects that in 2023 there will be a slight decrease to an average annual price of about $ 97 per barrel of oil, thanks in part to increased productivity.
However, the bottom line in this forecast was not optimistic. “We continue to see a historic record in energy prices as a result of the global economic recovery and as part of the consequences of Russia’s invasion of Ukraine,” the EIA claims. “Although we expect the pressure to rise in fuel prices to decrease, it is likely that the high price level will continue throughout the current year and next year.”
On the other hand, the forecasts of the large investment banks were much less moderate. Last week, Jamie Dimon, CEO of the US banking corporation JPMorgan, estimated that the price of a barrel of oil could rise to around $ 175 this year. Third this year, while Goldman Sachs “settles” for an average of about $ 140 a barrel in the third quarter.
Analysts also agree on the gap between oil demand and production supply in the second half of the year, which will include a shortage of about 500,000 barrels per day – despite increased output and accelerated utilization of fuel reserves in major industrialized countries. This, among other things, is due to the continued fighting in Ukraine, the return to full activity of industrial production in China after the closures and other reasons. It is worth noting that these estimates do not yet embody unforeseen scenarios, such as the possibility of rising tensions in the Middle East due to Iran’s recent moves in the nuclear field.
If we take into account that the price of gasoline at stations in Israel this month is derived from an average fuel price of about $ 110 per barrel, we may see here again this year gasoline prices in the range of 8.5 to 9 shekels per liter and maybe beyond.
Excise reduction dilemma
The high fuel prices are an unfamiliar territory for all the factors operating in the field of fuel – from the regulator and fuel companies on the supply side to the public of drivers and employers on the demand side. While this is a global general problem, the plight of many is no consolation.
At this stage, many countries in the world are taking an immediate solution, reducing some of the costs as much as possible, with an emphasis on those that are not related to the world price of a barrel of oil. The dominant component is government taxation – excluding fuel and VAT – whose average share of the price of a liter of fuel in Israel in recent years has been around 60%.
As mentioned, in April the Ministry of Finance had already reduced about half a shekel from the excise tax on a liter of fuel for three months, a move that proved to be only a temporary solution. Theoretically, the Treasury still has a tax margin of about NIS 2.75 per liter for further reductions as part of a dynamic move to stabilize fuel prices. However, any reduction of 10 cents in excise tax on fuel costs the Treasury a loss of income of about NIS 160 million, which is a very heavy budget cost.
Another problem in this context is value. The reduction of excise duty is in the power of a government subsidy for fuel consumption and the increase of pollution from private vehicles, which is inconsistent with the declared environmental policy to reduce travel and encourage the transition to public transport. On the other hand, in times of distress, it seems that environmental values are losing their importance, and not only in Israel. Even large countries in the “green” EU, which presents itself as a world leader in reducing vehicle emissions, have announced in recent weeks a reduction in fuel taxation and direct subsidies for drivers. These moves passed with marginal public opposition.
Another way for the state to lower the price to the consumer without paying a budget price for it is to reduce the margin of the fuel companies, which is called the “marketing expense basket” and constitutes about 8% of the price of a liter of gasoline at stations. The state can argue that if it contributes its share of the reduction, so can the fuel companies. However, it is highly doubtful that this will happen. Energy companies have a strong lobby, which in the past has effectively halted attempts to hurt marketing margins.
Another way to lower fuel costs and inflationary pressures is to reduce travel. Although in Israel there is currently no public transportation efficient enough to make drivers give up the private car, it is likely that if prices continue to climb – the volume of non-essential travel will decrease.
The problem of employers is more complex. As mentioned, many employers provide free fuel to thousands of civil servants’ vehicles, so the free fuel benefit is an integral part of the employment districts of hundreds of thousands of employees in the economy and it is difficult to reduce it without causing labor disputes.
From the fleets will salvation come?
Mass transit to an electric vehicle can solve the problem of the vehicle fleet, except for the fact that the current supply is far from satisfying the demand of the fleets in the segment for at least the next year and a half. Accelerated transition to vehicles with hybrid propulsion and plug-in can reduce fuel costs, but government taxation policies do everything possible to increase the cost of these vehicles.
However, the first signs of a change in the fleet’s policy are beginning to appear in the field – from discounted leasing prices offered to employees, which promise to significantly reduce travel, to the transition to the most effective method of reducing travel that has been “discovered” in the last two years. And if on the way rising fuel prices will also reduce congestion on the roads, the profit will be ours.