Monday, November 07, 2005

The Gas Tax of the Riksbank

The high oil prices have created worldwide anger over high prices of gasoline. Americans were shocked when in the wake of Katrina, gas prices reached $3 per gallon ( 1 gallon is 3.785 liters so this means the gas price was $0.80 per liter). Now it have fallen back somewhat from that peak and is usually closer to $2.50, but even that is shocking to Americans.

But that is of course nothing compared to the gas prices that exist in most Western European countries where the gas price is often double or more the $3 per gallon peak that Americans were so chocked about.

Sweden is one of those countries that have a extremely high gas price, with prices being usually around 12 kronor per liter or $1.50 per liter or $5.70 per gallon. Of those 12 kronor,around 7 are various forms of sales taxes.

Anger over this is increasing and there is a organized (non-violent) rebellion against high gas taxes called Bensinskatteupproret meaning "The Gas Tax Rebellion". It have so far collected nearly 670,000 signatures (And that is a lot for a country with 9 million people)for its call to reduce gas taxes.

Tax rebellions are of course always encouraging (Just too bad Swedes aren't as upset over other taxes). However, there is one aspect of all of this that seem to have gone lost. As usual no one blames the central bank for these price increases even though they are definetly part guilty too.

Gas is made by a internationally traded and into Sweden imported commodity and so prices depends on exchange rates. And the Swedish krona have fallen dramatically this year, being 20% more expensive versus the dollar and nearly 7% more expensive versus the euro. This is certainly something which should be blamed on the interest rate cut by the Swedish Riksbank this June from 2% to 1.5%.

Exchange rates are namely increasingly controlled by interest rates, and never have this been so clear as during the recent year. We have seen how the Swedish krona and the Japanese yen have fallen dramatically, as Swedish interest rates have come down dramatically and Japanese interest rates have stayed at their extremely low (at least in nominal terms) levels. The US dollar have on the other hand risen sharply versus the euro reflecting Fed rate hikes while Euro zones interest rates have stayed unchanged. The Brazilian real have been the big winner rising sharply versus the dollar (and by extension even more sharply versus other currencies), something which reflects Brazils extremely high interest rates in both real and nominal terms (To a lesser extent it also reflects Brazil's terms of trade gains from rising commodity prices).

If we make the quite reasonable assumption that the entire 7% decline in the Swedish krona versus the euro is a result of the interest rate cut and since 5 out of the 12 kronor gas price is either imported material or value added tax on it (something which automatically increase if the commodity price increases), this means that the gas price have been increased by 0.35 kronor from the Riksbanks rate cut. Any Swede upset about high gas prices shouldn't just be upset at the gas taxes, they should also be upset at the Riksbank.


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