The government gives me gas

And now for a story of a nature rarely seen in the pages of Samizdata – that of government policy incompetence resulting in farce. As in the rest of the world, we Australians are starting to rankle about paying the high petrol prices experienced at present. Politicians of all stripes sense votes in this issue, and they are right to do so – I am certain the average Australian firmly believes the government should Do Something about this added financial impost. Consequently, the Australian federal government has announced that it will Do Something About It by spending other peoples’ money. That should come as no surprise to those that watch governments with a w(e)ary eye, however this latest brain fart from the sages in Canberra – to subsidise Australian motorists if they convert their petrol powered cars to Liquid Petroleum Gas (LPG) – is more egregiously stupid and counterproductive than most, and deserves attention.

First, some background. LPG is widely available in Australian cities. All of the larger fuel stations sell it. LPG’s price is usually slightly less than half that of conventional unleaded petrol. I estimate that somewhere between 5-10% of cars have conversions enabling them to run on gas. A conversion kit, fitted, costs about A$2500. The federal government subsidy is worth up to A$2000 per conversion.

There are a number of fairly simple and certain predictions one can make from such a proposal, given the circumstances outlined above. Firstly, the cost of vehicle conversion will soar due to the massive increase in demand⁽¹⁾. No matter – the increased investment will soon be recouped through fuel savings. That is the whole point of the subsidy; alleviate the political headache of high fuel prices by getting Australians to switch from expensive petrol to cheap LPG. Of course, all things are static – especially prices.

Back in the unfortunate realm of reality, it is quite obvious that a return on the conversion investment is unlikely to be realised, because the price of LPG will also be a victim of incrementally increasing demand, as more and more gas-powered cars hit the road. The price of petrol may fall slightly, though oil (and thus petrol) is a global commodity with a more-or-less uniform price. Naturally, producers will sell their fuel in a market that provides the optimum return. Thus, supply will fall in concert with the slump in demand, leaving prices largely unchanged. And another factor to be considered by those who are thinking about taking up the government’s ostensibly generous offer – petrol excise is a major revenue earner for the Commonwealth. If this starts to dry up, lightly-taxed and increasingly-used LPG is going to look like quite an attractive target for the Treasury boys, narrowing the price gap further. The two fuels will probably reach price parity at some not-too-distant point; that is, the price of LPG will rise to meet that of petrol.

Simply put, this subsidy will achieve none of its stated aims, create a bunch of unintended negative consequences and is a most elementary economic blunder. The lesson – and it should be well understood by a government that trumpets its sound economic management at any opportunity – is that subsidies do far more harm than good. The big winners will be gas conversion component manufacturers and those installing this equipment. Gas suppliers also stand to benefit. The losers will be the broad pool of taxpayers (again) and those who have invested in a gas conversion kit in the vain hope of cheaper vehicle running costs.

What a marvellous outcome.

LPG-powered cars do, however, emit far lower levels of greenhouse pollutants than their petrol-powered counterparts. A nation of gas-powered cars may help Australia achieve its assigned Kyoto targets. We sensibly refrained from taking on that ball and chain, however we may as well sign the bloody treaty now – our adherence to it might be the only thing we have to show from the colossal waste of taxpayers’ money that is about to take place.

⁽¹⁾ = In my home state of Western Australia, our state government had already declared it was going to subsidise LPG conversions by $1000 per unit. This subsidy will now run on top of the federal government’s $2000 subsidy. Expect all conversions in WA to rise, probably overnight, from A$2500 to $3000+ when the subsidies come into force.