Saturday, 12 July 2008

Are they taking into account inflation?

Today I heard that the CSIRO says that petrol prices in Australia will reach eight dollars a litre within a decade.

When I first heard of eight-dollar-a-litre petrol, I thought they were releasing a climate change study that suggested $8 a litre would be the necessary price to reduce Australia's greenhouse emisisons to a reasonably sustainable level! As I have suggested in some earlier posts, even $8 a litre is too cheap if Australia wants to reduce its greenhouse emissions to virtually zero as would be required to maintain (restore, actually) the viability of water storages built at high cost in the 1950s. However, large increases in fuel prices would certainly provide more money than is needed to make Australia's transport system reasonably sustainable via demolition of unnecessary roads, reductions in road capacity and rebuilding of the entire rail system for high speeds and better alignment.

The whole problem is that there is the issue of inflation: the CSIRO report does not say explicitly that they mean eight of today's dollars per litre, which would be a decline in petrol's cheapness unheard of anywhere in the world since petrol became widely used.

Because rises in petrol prices are known to cause inflation, it is entirely possible that $8-per-litre petrol is really little less cheap than today's. Although it would require an inflation rate of seventeen percent to completely erode rises in the nominal price of petrol, if a general inflation rate of four percent continues to 2018, it will be as if petrol has only risen to $5.40 per litre, and at an inflation rate of eight percent it would be equivalent only to a rise to $3.70 per litre in today's dollars. Whilst both of these would be uncomfortable, they would hardly be the radical change called for: in fact, $3.70 is the amount paid in the exceptionally low-fragility environment of Norway and would be equivalent of we adjust for Australia's ecological fragility to something like $37 per litre!

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