Fuel Excise Cut May Backfire, Analysts Warn

The federal government's decision to halve the fuel excise for three months, aimed at easing cost-of-living pressures, is facing scrutiny from energy analysts who argue it could be counterproductive to Australia's long-term energy goals.

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If I had an opportunity to advise the government, I would have dropped the excise tax on diesel a bit more than on the petrol. Petrol is not the pain point. Diesel is the pain point.

While the cut has provided some relief for petrol prices, the impact on diesel, a critical fuel for key Australian industries such as agriculture, mining, and transport, has been less effective. Analysts point out that diesel prices have already rebounded, raising concerns about the systemic impact on production costs and food prices. The inelastic demand for diesel means that price fluctuations can significantly affect these sectors, potentially jeopardizing crop production and increasing operating expenses.

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Any disruption in diesel supply or sustained high prices, as we are experiencing, will directly affect production capacity, increase operating costs and ultimately push up food prices.

Experts like Lurion De Mello from Macquarie University and Samantha Hepburn from Deakin University suggest that the government's focus may have been too narrow, prioritizing short-term political gains over sound economic and supply chain management. The argument is that the excise cut on diesel might not have been substantial enough, or that the policy failed to adequately address the unique demand characteristics and critical role of diesel in the Australian economy. The concern is that such measures could inadvertently slow down the necessary transition towards electrification and energy conservation.

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So, arguably, the fuel excise settings may have been too focused upon politics and insufficiently focused upon economics and broader supply chain concerns.