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Economic costs outweigh initial political gains

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A coal-fired power plant and a refinery are seen beside a wind generator in Gelsenkirchen, Germany, in January 2020. Rather than imposing price controls on gasoline prices, the Bermuda Government should encourage alternative energy to reduce dependence on fossil fuels (File photograph by Martin Meissner/AP)

David Burt became finance minister for the second time in February and his decision to add that portfolio to his duties as the Premier left a number of unanswered questions.

Still unknown is the question of whether he plans to turn over the portfolio to someone else once the Budget debate is over.

If Mr Burt does decide to continue in the long term to juggle the two roles, how will his policies differ from his predecessor, Curtis Dickinson?

It was not possible to determine this from the Budget. It was largely prepared by Mr Dickinson and Mr Burt would only have been able to adjust it at the margins, although it seemed clear that some of the more political aspects of the Budget speech would have emanated from him and not from Mr Dickinson, who was rarely partisan.

Beyond that, it was difficult to determine how Mr Burt would steer the economy forward, especially given Russia’s invasion of Ukraine just one day before the Budget was delivered.

So Mr Burt’s announcement on Friday that he was refusing an increase in gasoline and diesel prices for April gave a clear hint of how he plans to manage the economy, and it suggests an approach that may be based more on political appeal than on economic principles.

Mr Burt, while an ardent supporter of free enterprise and entrepreneurialism, has always been more willing to encourage government intervention in the economy, with ideas such as the digital bank, than Mr Dickinson was.

Mr Dickinson always made it abundantly clear that he opposed price controls in the face of inflation and rises in the cost of living.

There are sound economic reasons for this. Price controls have undesirable consequences, especially when it comes to trying to control costs that are out of Bermuda’s control — like the price of a barrel of oil.

The classic economic argument against price controls is that they cause shortages of goods. Because retailers cannot make a reasonable profit — or are forced to take a loss — they immediately cut back supply of the good, invariably leading to shortages.

In other sectors, Bermuda does have forms of price controls, but these are usually intended to prevent monopolies such as Belco, long the island’s sole electricity provider and still the island’s sole distributor, from setting uncompetitive prices.

Gasoline and diesel prices have also been regulated since the 1970s, when prices were controlled because the gas station owners of the day were acting like a cartel and setting agreed prices, which was anticompetitive.

Since then, the Government has taken responsibility for agreeing the maximum price for gasoline and diesel. For the most part, this system has worked fairly well. This is the first time in memory that a finance minister has publicly turned down a price increase.

Although price controls for fuel are not new, they have generally been made through consensus and not imposition. There is no doubt that consumers are facing unusually high prices at the moment, although it is not clear if the recent spike will be sustained. And prices, while high, are not unprecedented.

Mr Burt made two important points in his statement on Friday. The first was that because the companies that buy oil for Bermuda do so over longer periods than one month, it is likely that the oil stocks they have in hand cost less than the current peak. Therefore, refusing a price increase now will not cut unduly into their margins. The second was that for now, this is a one-month price freeze. Assuming prices fall in the near future, there will be no need to further hold prices.

A little bit of this, a little bit of that: it is questionable whether David Burt has taken the decision to freeze gasoline and diesel prices for the good of the economy or because it is politically advantageous (File photograph by Akil Simmons)

On the face of it, many people will think that this is fair, since it gives Mr Burt and the Government time to see what happens on world oil markets.

He may face harder questions if the oil price does not decline. Then the price at which Rubis and Sol buy gasoline and diesel will rise, and price ceilings will cut into those companies’ profit margins. Some will say that this is no bad thing, but the reality is that the unintended consequences of such a policy can be severe, especially if consumers wake up one day to find the fuel pumps are empty.

The real question is whether Mr Burt has taken this decision for the good of the economy or because it is politically advantageous.

If it is the latter, it is dangerous because this is an area where politically popular moves and economically dangerous moves diverge very fast. Mr Burt will find it easier to freeze prices (for which he gets the credit) than to allow prices to rise (for which he would get the blame).

That is why governments have usually put these decisions in the hands of nominally neutral bodies such as the Regulatory Authority, which determines rates in the electricity and telecommunications sectors.

There is a longer-term solution that would enable gasoline, diesel and electricity prices to fall or at least to stabilise without the imposition of price controls.

That would be to reduce the duty charged for fossil fuels, at least in the short term. These were raised in 2015 and 2016 by One Bermuda Alliance finance minister Bob Richards at a time when oil prices were low and they therefore had the effect of increasing government revenue without unduly hurting people’s pocketbooks.

Now that prices are rising, it would be logical for these same duties to be reduced. But once governments have gotten used to a certain level of tax revenue, it is hard for them to give it up, as Mr Burt has apparently already found.

But this would be a fairer and less distorting way of delivering lower prices to consumers and businesses.

But it will be unpalatable, since it would likely prevent Mr Burt from balancing next year’s budget when he must already take into account a possible $25 million cut in revenue from the Aircraft Register, which will already have increased the projected $70 million budget deficit by almost a third.

Since Mr Burt has already made the decision to freeze prices, he would be wise to ensure this is a temporary measure and to try not to resist the tide of global price changes, about which he can do nothing. Instead, he should look to affect the area he can affect by reducing the $31.79-a-barrel tax his government imposes on consumers.

At the same time, he should also do something to continue to encourage the adoption of alternative energy which reduces Bermuda’s dependence on fossil fuels. The Government has already made a move in the right direction with its action to help the less affluent to install solar panels; if he is not going to reduce taxes, then he could mandate funds raised from fossil fuels to this fund.

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Published March 23, 2022 at 7:35 am (Updated March 23, 2022 at 3:33 pm)

Economic costs outweigh initial political gains

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