The taxation of the domestic consumption of petroleum products is an important source of revenue in most countries. It usually provides far more revenue than any other product, including tobacco or alcoholic beverages. However, the extremely wide variation in the retail prices and tax rates on petroleum products across countries is not found in other products whose consumption is also taxed. This paper discusses the reasons behind petroleum taxation policies, examines petroleum tax data for some 120 countries, and shows how tax rates for major petroleum products have changed between 1973 and 1991.
Because the level of petroleum taxes depends on a broad range of considerations, it is reasonable to expect some variation in petroleum tax rates among countries. Most countries do not seem to take explicit account of road usage, pollution or congestion costs in setting the tax rates on petroleum products. The overriding justification appears to be that these products can be taxed easily. However, the appropriateness of both extremely low petroleum prices and taxes and extremely high petroleum prices and taxes can be questioned on both economic efficiency and welfare grounds. A significant reduction in present extremely wide variation in petroleum prices and tax rates is therefore likely to improve economic efficiency and welfare in many countries.