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The Link to Sustainable Profitability – the Need to Achieve Stability of Fuel Prices Kenneth G. Ruffing, Ph.D. Former Chief Economist – OECD Environment Programme 30th IRU World Congress Dubai/UAE, 14-16 March 2006 Three inter-related issues The relation between profitability of companies and sustainable development Fuel price fluctuations – objective and speculative factors Tools to smooth out such fluctuations and promote environmentally sustainable fuel use The relation between profitability of companies and sustainable development in road transport (1) Sustainable development requires integrating environmental, social, and economic considerations. Companies cannot do this all by themselves without damaging profitability – but they can promote efficient use of fuels, vehicles, and infrastructure up to certain limits where they will simultaneously reduce costs and improve environmental outcomes (ecoefficiency). The relation between profitability of companies and sustainable development in road transport (2) Policy intervention is therefore required to internalise social and environmental costs, while charges for the use of infrastructure should be set at the short-term marginal social cost (including the cost of congestion). As we will see, this would require changing the structure of fuel taxes and other taxes and charges in road transport together with a range of other policies. Fuel price fluctuations – objective and speculative factors (1) Petroleum is increasingly used for transport as natural gas (and other energy sources) displace it from other uses (heating, power generation). But hydrocarbon-based transportation fuel will increasingly come from more expensive conventional and non-conventional sources as rapidly increasing demand presses on slowly growing supply. Depending on the speed of development of new oil fields in deposit-rich countries, peak production world-wide from conventional oil is likely to occur by 2030. Fuel price fluctuations – objective and speculative factors (2) Even if recoverable reserves are grossly underestimated – say, by a factor of 2 – the peak would be postponed for only another decade or so. Thus, the long-term trend will be for rising prices from about 2010 when many forecast that prices will have come down from current levels to about 35 USD in 2004 prices. By 2030 real prices could reach 39 USD according to the International Energy Agency assuming increased production from the Middle East and North Africa, but as much as 52 USD in the event of a supply shortfall. Fuel price fluctuations – objective and speculative factors (3) Increased oil exploration and production, as well as increased refinery capacity in China, India, and EU expected to ease current tight product supply situation by 2010. When the marginal supply of transportation fuel is mostly large-scale industrial production from non-conventional sources, such as tar sands, heavy oil, coal-bed methane, advanced bio-fuels, etc., there should be fewer price fluctuations, but at much higher average price levels. Fuel price fluctuations – objective and speculative factors (4) And speculative factors such as political uncertainty will quickly produce premiums over and above the price that would balance supply and demand. Absent unpopular measures to establish a high floor price (above 40 USD per barrel) there is a risk that production capacity for extraction, distribution, and refining will expand at an insufficient pace to avoid periodic price spikes when (inevitable) temporary supply disruption occurs. Measures should be sought to limit speculative energy price fluctuations. Tools to smooth out such fluctuations and promote environmentally sustainable fuel use (1) Reforming fuel taxes together with broadening and deepening road pricing would help rationalize transport demand and promote the more rapid uptake of alternative fuels. Mandatory increases in vehicle fuel/CO2 efficiency in the U.S. and greater efforts to meet voluntary targets in Europe, Japan, Korea for 2008-2009 would further improve efficiency. Tools to smooth out such fluctuations and promote environmentally sustainable fuel use (2) Improved contingency plans such as the IEA emergency response systems to deal with supply disruptions should be opened to other countries. Use of forward markets and long-term contracts, in any case, means that product prices paid by users fluctuate less than spot prices for crude oil. Improving the image of road transport (1) Improving the extent to which road systems are selffinancing and external costs are optimally priced would make the financing of roads to be seen as fair (because only the users pay) and transparent (no hidden transfers surrounding the financing of roads) For urban expressways, with pooling of surpluses and deficits across segments, constant economies of scale appear to be a good approximation—a necessary conditions for full self-financing. If other external costs are reflected in optimal prices, e.g., carbon taxes as a component of fuel taxes, accident costs in insurance premiums, road wear and tear in heavy vehicle levies, opportunity cost of space in parking fees, etc. then road pricing should pay the rest. Kilometer based charging for inter-urban expressways is one component. Improving the image of road transport (2) Short-run optimal congestion charging for urban expressways and cordons is another. It offers another important benefit—a signal for expanding capacity; this is generated when revenues per unit of capacity exceed the unit (capital) cost of capacity. This market test would help improve the transparency and credibility of benefit/cost analysis. These measures should be accompanied by others such as improving the quality and availability of mass transit, improving inter-modality of freight, increasing the efficiency of rail transport, and using ecologically sensitive infrastructure design. Mandatory increases in fuel efficiency, taxes on aviation fuel, subsidies to accelerate alternative fuel vehicles, inclusion of transport in carbon emission trading schemes, and/or voluntary offset programmes, should all be part of the policy mix. Practical measures to cope with fuel price fluctuations - IEA emergency response systems Maintenance of national emergency oil reserves and plans for co-ordinated use; National measures, e.g., demand restraint, fuel switching, surge oil production; Operations and co-ordination of effective national emergency organisations; Testing response measures and providing training in realtime emergency situations; Industry advice and operational assistance through Industry Advisory Board and Industry Supply Advisory Group; System for reallocation of available supplies. Practical measures to cope with fuel price fluctuations – “Saving Oil in a Hurry” Title of a recent IEA publication focusing on urban transport in the face of supply disruptions; Stresses need for preplanning, detailed plans, and certain investments; Major measures include increases in public transport usage, increases in car pooling, reduced speed limits, telecommuting, changes in work schedules, driving bans and restrictions, providing information on “eco-driving;” Underscores importance of not bowing to pressure to lower existing fuel tax or road charging regimes as this would just stimulate demand. Relative importance of transport’s energy consumption Year Total final consumption(Mtoe) o/w Transport Percentage (%) Total final consumption (oil) o/w Transport Percentage (%) 2002 7075 1867 26 3041 1737 57 2010 8267 2230 27 3610 2120 59 2030 11176 3273 27 5005 3110 62 IEA: World Energy Outlook 20004 Road (%) Air (%) Water (%) WBCSD: Mobility 2030 80 12 7 76 16 8 References ECMT, Efficient Transport Taxes and Charges (CEMT/CM(2003)8), 2003. ECMT, Managing transport demand through user charges: experience to date (CEMT/CS(2004)7), 2004. World Business Council for Sustainable Development, Mobility 2030: Meeting the Challenges to Sustainability,2004. OECD, Policy Instruments for Achieving Environmentally Sustainable Transport, ISBN 92-64-19826-1, 2002. OECD/IEA, Biofuels for Transport, ISBN:92-64-01512-4, 2005. OECD/IEA, Saving Oil in a Hurry, ISBN 92-64-10941-2, 2005. OECD/IEA, World Energy Outlook 2004, ISBN 92-64-10817-3, 2005. Santos, Georgina, Road user charges and infrastructure, ECMT Roundtable 135 (forthcoming), 2005. Verhoef, Eric T., Transport infrastructure charges and capacity choice, ECMT Roundtable 135 (forthcoming), 2005.