We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

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.

8 comments to The government gives me gas

  • drscroogemcduck

    lpg doesn’t pay excise? if so, this whole thing is a false economy.

  • Brendan Halfweeg

    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.

    This is just a pattern repeating itself, from first home buyers grant, baby bonus, LPG conversions, Australian taxpayers love to be bribed with their own money. We need to be able to simply and effectively argue this point to the widest possible audience if we ever expect the electorate to be informed enough to see it for what it is.

    This sort of stuff makes me depressed about ever returning to Australia, the workers’ paradise.

  • Unless the technology has improved a lot since the last time I looked at it, any duel fuel system using LPG will get poor performance because engines that aren’t optimized expressly for gaseous fuels won’t get enough air to efficiently and cleanly burn the LPG.

    For that matter, most contemporary vehicles use fuel injectors instead of carburetors. Do the conversion kits provide duel use injectors? (Do those even exist?) Without duel fuel injectors, relatively few vehicles can be converted.

    Technical issues might prevent the program from becoming so large that it causes major headaches.

  • Shannon – not totally sure about the technicalities, however (unfortunately) most cars can be converted. From memory, I believe the valve seats are changed… also, there is a slight drop off in fuel economy when running on gas.

  • andrew duffin

    drscroogemcduck is right. (great name btw!)

    The only reason LPG is cheaper is that the duty is much lower.

    The only reason the duty is much lower is that hardly anybody uses it.

    Increase the usage, to the point where the stationary bandits start to notice their fuel tax yield falling, and what do you think will happen? Yes, that’s right, they’ll bang up the duty rate.

    Back to where we came in.

    Why bother?

  • That’s incorrect, Andrew Duffin – LPG is not cheaper solely because of lower duty. The petrol excise is 38 cents per litre. Petrol is considerably more than 38c/L dearer than LPG. LPG is cheaper (gross and net) than petrol. For now.

    I do agree, however – why bother?

  • andrew duffin

    James Waterton: actually the rate is 47p per litre for petrol, equating to £2.41 per gallon, TO WHICH VAT at 17.5% is added (ie tax on the tax, yes).

    Still trying to find the figure for gas.

  • Um, Andrew…we’re in different countries. This story, and the rate of excise on petrol I mentioned, applies to Australia. Not the UK.

    Still, we have some things in common. A consumption tax is levied on top of the 38c/l excise in Australia, too.

    Hooray!