Gasoline Prices

The price of gasoline is rising rapidly while Republicans in power, so we hear Democrats attacking. What could bring down the price of gasoline?

A rapid decrease in gasoline consumption, because supplies are inelastic, would lead to decrease in prices. Oops, forget that option. A rapid decrease in tensions with Iran and decrease in hostilities in Iraq and more confidence that the government and the people in various oil supplying countries will find a way to get along. Not on the table for the immediate future.

Prices may come down after the MTBE/ethanol transition occurs. While gasoline refineries need to produce different blends for winter and summer, cold, cool, and hot areas, as well as meet pollution standards, perhaps the US could get by with fewer blends, fewer “boutique” refineries. But while boutique refineries increase costs somewhat, fixing this problem would not bring fuel prices down to a level that US consumers consider normal.

Lowering taxes won’t have much effect today, as the supply is inelastic relative to demand, so price tinkering doesn’t affect the prices. This means that if we added a large tax on fuels today, prices would not change much, what would change is the amount of each $ going to OPEC. The only solutions are to increase supply, or reduce demand or both. (Drilling in the Arctic National Wildlife Refuge is not such an important part of the solution that we should focus on it.)

The high price of gasoline and oil in general has several disadvantages, including funding unstable governments, and state funded terrorism. Iran’s threats to lower oil production interfere with the world’s ability to persuade Iran to abide by the non-proliferation treaty it signed.

For the average person though, the main disadvantage is uncertainty. Americans use their cars for more than a decade. Cars now on the street were bought in anticipation of low fuel costs over the life of the car. The rules have changed, and people now have to guess what the future rules will be.

However, if we could guarantee that prices would continue high, there would be a transition period, but we could adjust. We have to tax something — incomes earned or not, property, sales. We could phase in a high fuel tax, similar to European levels, over a decade or so. Then increases in fuel prices would not be so rocky. And really, there are too many dynamics coming together, some related, that prevent us from assuring prices stay low.

Some of the fuel tax could fund research on lowering energy costs (higher efficiency), or lower carbon energy (which will lower acclimation to climate change costs). Some could be diverted to creating better mass transit. Some could be used to pay earned income credit to the poor, who can’t adjust as easily to a more expensive world. (An enormous amount of economic analysis has concluded that giving people money and letting them spend it is much more efficient and cheaper than finding some way to address specific expenses. If I’m wrong, please advise!)

Some of the fuel tax could reduce the inevitable future tax increases on income.

These ideas are politically unpopular. However, the idea that we can “do something” about fuel prices in the short term is unrealistic. In the long term, increasing fuel efficiency a lot, creating alternative fuels from waste, plant residue, and specially grown crops, and decreasing driving and flying through bus, light rail, and train alternatives — all of the solutions we can come up with will only slow the inevitable increase in fuel prices. There are too many of us, and most of us want to increase our individual consumption.

Not only will the price of a barrel of crude likely continue high (with some likely bumps along the way), but that money will increasingly go to OPEC countries, and will likely go to increasing local and world instability. Anyway that we can find to decrease demand — stop us before we sin again — will help. And there is no reason to think that Americans will cut back on fuel use significantly without fuel taxes.

What is your thinking?

Some numbers, more later:

• The US consumes 20 million barrels/day. With 4.5% of the world’s population, we consume about a quarter of world consumption of 81 million barrels/day.

• Oil prices are still below the inflation-adjusted peak during 1980, over $90/barrel in today’s dollars.

4 Responses to “Gasoline Prices”

  1. Bob Seeley says:

    If higher gas prices lead to lower consumption, that is all to the good, but as you point out, this will not happen rapidly because U.S. consumers (and shippers) are caught in a trap. They planned their lives—not just automobile purchases, but where they live, where they work, and other parts of their lives—based on low fuel costs. Higher fuel taxes are politically unpopular for a reason: people worry about how they will get to work and school if driving becomes too expensive. The logical response would be to buy more fuel-efficient cars or demand better public transit, but American aren’t very logical about their cars.

    In the long run, the private car as a primary mode of transportation is not viable for environmental (climate change) and expense (peak oil) reasons). But getting to the long run will be very painful and mean a lot of adjustment—if we get there at all.

    The danger is that politicians will concentrate on the price of gasoline and not begin saying what needs to be said: that we can’t go on like this.

  2. Mary Ann Baclawski says:

    I’m currently reading the book, “The omnivore’s dilemma” by Michael Pollin. To quote, “today it takes between 7 and 10 calories of fossil fuel energy to deliver 1 calorie of food energy to an American plate… only a fifth of the total energy used to feed us is consumed on the farm; the rest is spent processing the food and moving it around”.
    How we travel is a major part of our problem, but it’s not our only one. I’d love to see you address this in a future blog.

  3. Mike says:

    I believe the quickest way to reduce the price of oil is to stop buying goods from China.
    Their economy is booming right now and our purchasing from them is one of the reasons.
    They are converting our dollars to oil.
    After the president of China visited the U.S. recently he stopped of in Saudi Arabia. The Arab countries are upset with us for our refusal of the UAE to be allowed the port contract.
    China could make a deal with Arab Countries to protect their oil fields in return for prefferential treatment.
    The Chineese are not bound by any of the moral or ethical codes that we are, and could guard the oil fields using any means.

  4. Trish says:

    The high cost of gasoline will take it’s toll on the same people…the poor and the disadvantaged. Big old used cars are still being used by those who can’t afford anything newer and more fuel conservative. Getting to work is a struggle for those trying to support families and make ends meet. In the long run, being environmentally friendly will become more than necessary. Our world is a fragile place and can’t take this pounding much longer. In the short run, we need to remember that not everyone will be able to haul the solutions ( More taxes, spiking oil prices, increases in just about everything that takes energy, Etc.)