Gasoline prices will continue to rise

Dubi Ben-Gedalyahu

High gasoline prices are a blessing for Better Place

The price of gasoline will not come down anytime soon for three key reasons: politicians' hypocrisy - they voted to raise the excise, but claim that they are now surprised; and inflexible demand for gasoline, regardless of its price. It is also creating opportunities for Shai Agassi's electric car venture.

The current anger at gasoline prices is a classic case of a slow-burning fuse. The excise hike was well documented, the Ministry of Finance planned it over a long time, and it won sweeping approval in the cabinet and Knesset when they approved the biennial budget for 2011-12.

The budget item is explicit: "Raise taxes on products with negative externalities, such as gasoline, polluting motor vehicles, and cigarettes. The importance of these measures is honed in view of the fact that the new fiscal rule allows a higher rate of increase that the amount of government expenditure compared with previous years."

The budget forecast underscores the point: it estimates the tax revenues from the gasoline excise at NIS 16.6 billion in 2011, 12.6% more than in 2010, and at NIS 18.8 billion in 2012, a further increase of 11.4%.

The public's anger will presumably result in various cosmetic solutions. The politicians' media and image advisors are undoubtedly working on a package of impressive-sounding measures that will lack any actual content. In short, get ready to pay more than $2 per liter of 95 octane gasoline.

In theory, the gasoline excise could be slashed, if the Ministry of Finance discovers that far higher prices results in much less driving. This breaking point is well known elsewhere in the world, and occurred during the oil crisis of 2007 and credit crisis of 2008. Nonetheless, demand for gasoline is relatively inflexible, regardless of its price.

A major reason for this inflexibility in Israel is that the number of cars is relatively high as a proportion of all motor vehicles, compared with other countries. Moreover, employees get free fuel for their company cars.

To bring down the amount of driving, thereby reducing fuel consumption, two things have to happen: either the car fleet has to shrink drastically, because of a recession and job losses, for example; of the free fuel for company cars has to be abolished.

An example of the first condition occurred in 2002 after the car market internalized the impact of the high-tech bubble bursting and the leasing market shrank. That year saw the first reduction in car travel since 1969. The second condition, is well understood to CEOs and CFOs of companies with fleets of hundreds or even thousands of cars, who are facing up tens of millions of shekels in extra costs a year, but involves confrontation with employees. NIS 7.40 per liter is not enough to cross the companies' threshold of pain to force such a confrontation, but who knows what will happen at NIS 8 per liter or more.

While $2 per liter of gasoline is casting a heavy shadow on the car market, it is creating far-reaching business opportunities for alternative engines. Importers of Honda and Toyota hybrid cars are making a bonanza. The niche market of natural gas-engine cars is also reporting a jump in demand and interest by private customers, although the leasing companies are still not playing a role.

Finally, there are the importers of electric cars. While their business model is not yet known, the model of Better Place LLC is known and was thoroughly analyzed by Deutsche Bank two years ago. The model's success largely depends on the differential between the rising price of gasoline per liter for an ordinary car, and the price per liter of an electric car for Better Place subscribers, which is mainly derived from the wholesale price of electricity, plus financing costs and battery amortization (which costs almost as much as the car).

A brief calculation shows that the latest jump in gasoline prices, combined with the excise hike, is a blessing for the future electric car recharging vendors. The price and excise hikes put the "period of return for the electric car" calculated by Deutsche Bank (based on Better Place's figures) shortens the period by 3-4 years compared with its natural projection.

Published by Globes [online], Israel business news - www.globes-online.com - on February 8, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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