Seán Power (Kildare South, Fianna Fail)

I thank Senator Ross for raising this topical and interesting matter. I am responding to it on behalf of the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Mary Coughlan.

The retail price of all carbon fuels, including diesel, has increased significantly in recent months. This essentially reflects the considerable increase in the global wholesale price of oil. As Senator Ross will be aware, the Irish oil industry is fully privatised, liberalised and deregulated. There is free entry into the market and prices at the pump for petrol and diesel reflect market factors, notably global market price, transportation costs, euro-dollar fluctuations and other operating costs.

In analysing how the retail price of fuel products such as petrol and diesel is calculated, a number of facts should be borne in mind. First, excise duty rates in Ireland for auto-diesel and petrol are €368.05 and €442.68 per 1,000 litres of fuel. respectively. These rates are lower than the EU 15 average and than those of our main trading partners, especially our nearest neighbour, the UK. Furthermore, excise rates for diesel, petrol and other fuel oils have not been increased in the past four budgets.

The Exchequer yield from excise does not increase as the price of fuels increases because excise is set at a nominal amount. On the other hand, the yield from VAT increases as the price of fuels rises because the former is set as a percentage of the price. However, it should be borne in mind that in the context of the extent to which spending in the economy is reallocated to petrol, diesel and other oil products and away from other VAT-liable spending, and the extent to which the overall level of economic activity is reduced by higher oil prices, there may be little or no net gain to the Exchequer. Businesses are entitled to reclaim VAT incurred on their business inputs, including that incurred in respect of fuel. For example, VAT incurred on auto-diesel and marked gas oil used in the course of business is a deductible credit for business in the Irish VAT system.

In so far as calls for reduced taxes are concerned and in light of the impact high oil prices can have on growth rates, the European Council of Finance Ministers, ECOFIN, considered the issue of an appropriate policy response to the price increases at its meeting on 3 June 2008. ECOFIN confirmed the agreement reached in Manchester in 2005 to the effect that distortionary fiscal and other policy interventions should be avoided because they have the effect of preventing necessary adjustments by economic agents. Reducing taxes on fuels would send the wrong signal to consumers and oil producers. We must be careful, therefore, not to exacerbate an already difficult situation.

Any measure relating to fuel prices would have to be targeted at the most vulnerable in society. The Government has taken successive opportunities to make real and significant increases to payments to pensioners and the socially excluded and also to reduce the levels of tax paid by lower income earners. The national fuel allowance scheme and the household benefits package provide specific assistance to the less well-off in respect of fuel costs.

In so far as the relativity between the price of diesel and petrol is concerned, as Senator Ross stated, diesel traditionally has been less expensive than petrol at the forecourts in Ireland. This was due to the fact that the international prices for both products were previously at a similar level and that excise duty is lower on diesel. European production was also closely matched to demand for both products. The international price of diesel has, however, increased relative to petrol for a number of reasons.

Demand for diesel is rising in Europe and China and also in other rapidly developing economies worldwide. According to the March and April International Energy Agency oil market reports, Europe has been experiencing lower imports of distillates from the US and elsewhere because cargoes have been diverted to Latin America, South Africa and the Middle East. The increased demand for aviation fuel, which comes from the same part of the barrel of oil as diesel, is also a contributory factor.

European refineries are unable to keep pace with the demand for diesel. Each barrel of oil can only be used to produce a certain percentage of diesel and European diesel demand now exceeds production. This means that diesel must be sourced from further afield, particularly from Russia, and the price is thus affected.

The International Energy Agency has reported that US refiners have been producing substantially more barrels of petrol than usual and that domestic US stocks have been well above their five-year range. High US stocks, coupled with lower than anticipated demand and low prices in that country, are likely to have curbed flows of exports of petrol from Europe to the US. This has resulted in higher stocks of north-west European petrol. The combination of these market factors has contributed to the rise in diesel prices relative to petrol.

The increase in the price of diesel is affecting all of Europe. According to recent EU data, out of 27 member states, Ireland is in the mid to lower range for petrol and auto-diesel prices. Furthermore, it is mainly the newer member states which have lower fuel prices than Ireland. These comparisons demonstrate that Ireland is by no means the worst affected country in Europe in respect of the retail price of diesel and petrol.

The rising cost of fuel will clearly impact on all aspects of our economy. In so far as consumer prices are concerned, Senator Ross will be aware that Government policy in respect of prices, including the price of commodities such as petrol and diesel, is concentrated on the promotion of competition, consumer choice and awareness. There is no price control on these products and in common with most other goods and services, price differences are an ongoing feature of the market economy. It is a matter for retailers to explain price differences where they occur. The Retail Price (Diesel and Petrol) Display Order 1997 requires petrol stations to display their prices in a clear and prominent manner so that consumers can make an informed choice. This order enables consumers to compare prices readily and purchase their fuel on the basis of such a choice. The National Consumer Agency is responsible for enforcing the order.

The upward global trend in oil prices reinforces the imperative for Ireland to reduce its oil dependency and to use energy wisely and efficiently. Senator Ross will be aware of the actions being taken by Government to accelerate delivery of our targets in respect of renewable energy and energy efficiency, which are essential to ensure a sustainable energy future for the economy and consumers.

The Government fully recognises the concerns arising as a result of the hikes in fuel prices. However, the increase in the price of fuels, including that of diesel, is not tax-driven but rather is an international phenomenon affecting all countries and all sectors of the economy and society. Fuel prices are driven by a number of factors, including the price of oil on international markets, exchange rates and production and refining costs. The rise in oil prices in recent times reflects additional factors such as geopolitical uncertainty, supply disruptions and strong economic growth in countries such as China.

It is clear, therefore, that rising fuel prices present a significant challenge for consumers, businesses and indeed for the whole of our society. It is important that, as a society, we all face this challenge and play our part in meeting it. I assure the Senator that the Government, through the pursuit of prudent policies, will play its part in seeking to ensure that the interests of all sectors of our society and of the economy as a whole will not be impacted unduly by the ongoing effects of rising fuel prices.