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Fuel Taxes: Why Gas Prices Vary So Much

You’ve probably heard about the dirt-cheap gas prices in places like Venezuela, where citizens can fill up for mere cents a gallon. While it might frustrate Americans to know that gasoline is so cheap in some countries, they can take comfort in the fact that there are places where gas is much more expensive. I remember how expensive gas was 13 years ago when I was an exchange student in Europe. What some consumers pay at the pump [3] in other countries far exceeds what we pay here.

But why the discrepancy? It is generally acknowledged that the biggest reason that gas prices vary so widely at the pump is to do with taxes. Many countries impose an excise tax on fuel sales, and, in countries that contain provinces and states, there might be additional taxes imposed at a more local level. Kiplinger [4] recently compiled a list of gas prices around the world, and the top price on their list is Turkey, where consumers pay $9.96 per gallon. The lowest price on the list is Venezuela, where gas is $0.08 per gallon.

Taxes, Subsidies and Government Decrees

Fuel prices around the world are almost universally decided by governments. Sure, supply and demand have something to do with what we pay. But taxes, subsidies and government decrees can affect the price more than other factors. According to NACS [5], in the United States, as of the beginning of 2011, the federal excise tax on gasoline was 18.4 cents per gallon. Of course, states can add their own taxes to that; the January 2011 average was 48.1 cents per gallon for gasoline taxes. (Diesel carries a federal tax of 24.4 cents a gallon, and an average fuel tax of 53.1 cents per gallon, once state taxes are added in.) Some states even charge a sales tax on fuel sales, further boosting the price consumers pay at the pump.

No matter how much we complain about fuel taxes [6], though, other countries have it worse. With the exception of some countries in the Middle East and some South American countries, nearly everyone pays more than we do at the pump. Indeed, Canadians living in Ontario pay about 38% of the cost of their gasoline ($5.56 according to Kiplinger) in taxes. When you consider that Canada is a major oil producing country, providing the U.S. a great deal of the commodity, it seems strange that Canadians don’t pay less for gas than we do.

And, of course, European countries are known for their huge taxes fuel. Countries like Germany levy a fuel tax, and then require the payment of a value-added tax on the fuel itself, as well as the fuel tax. Norway, another country with a large oil export industry, taxes fuel heavily, with gasoline taxes accounting for more than 60% of the price. Sweden levies carbon and energy taxes on gasoline, and a VAT [7]. Kiplinger reports that the French pay $4.50 a gallon in taxes — accounting for more than half the $8.29 per gallon price.

Subsidies from some governments mean that consumers get access to lower fuel costs. Rather that taxing gasoline at high rates, governments in Iran, Venezuela, India, Saudi Arabia, Mexico and a few others subsidize it to help keep prices relatively low. (Although it is worth noting that, even with subsidies, consumers in China, India and some other countries still pay more for gas than Americans.)

In some cases, the government sets gas prices. Saudi Arabia subsidizes, and it sets prices by royal decree. The Chinese government changes gas prices when there is a large enough shift in oil prices over a limited period of time. However, many of these regimes are wary of allowing prices to rise too far, since it could result in protests and discontent among the populace.

Other impacts on gasoline prices around the world include how far the gas has to travel, as well as demand for oil (including the rising demand for gasoline by a growing middle class in China and India), and political upheaval in oil producing regions. Because the U.S. taxes its gasoline less than most other developed countries, and because the U.S. gets a great deal of its oil from Canada and Mexico (#1 and #2 sources of oil imports to the U.S. [8]), we are actually quite fortunate when you think of the price many others pay for gasoline.

(Photo: revtim [9])