Members' Research Service By / January 12, 2023

How will increasing fuel prices impact transport? [Ten issues to watch in 2023]

The war on Ukraine and the subsequent uncertainties and sanctions have caused shortages and disruption in supply of resources, including for petroleum products.

Written by Monika Kiss.

This is the seventh edition of an annual EPRS publication aimed at identifying and framing some of the key issues and policy areas that have the potential to feature prominently in public debate and on the political agenda of the European Union over the coming year.
The topics analysed encompass the 2024 European elections, budgeting in times of crises and war, lessons for public investment in the EU from the EU recovery instrument, the fiscal and monetary policy mix, climate
and socio-economic tipping points, the impact of increasing fuel prices on transport, cyber-resilience in the EU, protecting media freedom and journalists, the future of Russia, and geoeconomics in an age of empires

Increasing fuel prices

Figure 5 – Price without taxes – EU weighted average

The war on Ukraine and the subsequent uncertainties and sanctions have caused shortages and disruption in supply of resources, including for petroleum products. Furthermore, the sixth EU sanctions package of 3 June 2022 introduced a partial ban on the import of oil and petroleum products from Russia. Russian oil imports into the EU fell from 2.5 million barrels per day (bpd) in January 2022 to 1.4 million bpd in October 2022. An EU ban on Russian crude oil imports became effective on 5 December 2022, and one on refined petroleum products will do so on 5 February 2023. As a consequence, the increase in prices of diesel, petrol (Euro-super 95), as well as liquefied petroleum gas (LPG) has been exceptionally fast. After the decreasing prices during the pandemic, the contrast was strong.

Transport, a sector already in transformation

Europe’s transport sector is transforming due to the decreasing use of fossil fuels and the increasing use of greener transport modes, encouraged through financial incentives in Member States, and EU initiatives and legislation with binding targets and deadlines. Most transport modes (road, air, sea) are reliant on petroleum products, Only rail has been electrified to a large degree in the EU. In road transport, around 40 % of cars depend on petrol, and about 20 % on diesel, while more than 95 % of trucks still rely on diesel. The share of energy from renewable sources used for transport in the EU increased from under 2 % in 2005 to 10.2 % in 2020. Meanwhile, policymakers are increasingly focussing on greening transportation. As outlined in the European Green Deal and enshrined in the European Climate Law, the EU aims to achieve climate neutrality by 2050, and the transport sector has an important role to play in this. The sustainable and smart mobility strategy, presented in December 2020, outlines how the EU transport system can achieve a green and digital transformation and become more resilient to future crises. It aims to reduce dependence on fossil fuels by 2030 and encourage alternative choices, such as the use of high speed railway and inland waterways. The fit for 55 package is a set of proposals on climate, energy, transport and taxation policies aimed at reducing net greenhouse gas emissions to at least 55 % by 2030, compared to 1990 levels. It also promotes the growth of the market for zero- and low-emission vehicles and aims for zero emissions from new cars by 2035. Furthermore, it proposes to extend carbon pricing to the aviation and maritime sectors.

The multifaceted impact of rising fossil fuel prices on transport

As most transport modes rely on the use of petroleum products, a rise in fossil fuel prices impacts several dimensions of the transport system.

Possible structural impacts are, for instance, changes in usage levels – users limiting or rationalising their usage, for example by abandoning, postponing or combining their trips. Operators might also reduce service frequency. Modal shifts can occur – part of the traffic can shift to a more energy efficient mode that suffers less from increasing petrol fuel prices, for instance road freight transport to rail or inland waterways. Air transport might also be significantly impaired after the increase by 70 % of jet fuel prices during the first 6 months of 2022 and the already low profit margins. This might lead to a shift towards rail or maritime. New network configurations in terms of gateways, hubs, routing, and corridors are also among the consequences. Rising fuel prices will also impact different parts of supply chains – procurement, manufacturing, distribution) and a reconfiguration of the whole chain might become necessary.

The impact also has a temporal dimension: while at first passengers (or companies) could simply absorb the higher costs by reducing usage, trimming their profits or cutting their spending in other areas, in a subsequent phase, there would be changes in commuting patterns (like ridesharing or carpooling), attempts to use public transport, rapid adoption of vehicles with high fuel efficiency, and a search for other transport alternatives. Concerning the transport of persons, increasing fuel prices can lead to higher transport prices, causing an additional burden to households and possibly transport poverty, unless this is compensated at regional or national level. Low-income households that own a car, and rural households spending a higher share of their income on transport fuels, are particularly impacted.

In the domain of freight transport, companies have the choice to work at a loss or to increase their prices to compensate. Price increases will also have an impact on transport services and the prices of the goods transported, which can lead to further inflation. In both passenger and freight transport, there is an increasing number of strikes of transport providers and workers in all transport modes and this tendency will most probably continue, leading to further disruptions.

Increasing fossil fuel prices can also have important side effects., for example shortages in the production of AdBlue, a liquid used in diesel vehicles to neutralise nitric-oxide emissions. Because its production is not profitable due to high gas prices, some manufacturers have already stopped producing it, which could lead to the standstill of a huge number of trucks, and consequently job losses and logistical problems.

Another question is whether the increase in fossil fuel prices will have a favourable impact on the speed of transition towards greener transport modes or the use of more renewable energy, and if it will lead to a reduction in greenhouse gas emissions. As the majority of greenhouse gas emissions from transport are carbon dioxide (CO2) emissions from the combustion of petroleum-based fuels, reduced consumption of fossil fuels as a result of increasing prices could in fact lead to lower emissions of greenhouse gases. This could have the result that emissions targets can be reached more quickly. Emissions can also be reduced through the use of higher shares of advanced biofuels and a more ambitious quota for renewable fuels of non-biological origin such as hydrogen. This is encouraged at EU level in the proposed revision of the Renewable Energy Directive and the REPowerEU plan, aiming for a higher renewable energy target.

The use of fuels produced using renewable sources of energy (such as electricity produced from solar or wind energy), and the use of biofuels is less costly and leads to lower emissions. Nevertheless, this can be a solution only in the long or medium term, as it requires technical adaptation, or even the construction of new types of engines. Recent research also shows that the use of e-fuels – fuels in gas or liquid form that are produced from renewable (solar or wind power, for example) or decarbonised electricity – such as e‑methane, e‑kerosene and e‑methanol, costs 47 % more than battery-electric vehicles. In the long run, however, technological developments will make it possible to reverse this tendency and to advance on the road to greener transport.

Read the complete in-depth analysis on ‘Ten issues to watch in 2023‘ in the Think Tank pages of the European Parliament.

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