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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.