Gasoline prices

Probably because they are posted in big red letters beside the road, because putting gas in a car is probably the single most universally and frequently experienced transaction Americans make, and because we seem to have this identity meme about being who we are because we can drive alone anywhere we want and park free when we get there, gas prices have become a sort of floating indicator of how terribly the country is on the wrong track, deplored by all our political leadership and constantly waved around by pundits and commentators signaling their understanding of how ordinary people live.

This is too bad for several reasons.  A dollar difference in gasoline prices, for a family that drives 10,000 miles a year in a car that gets 20 mpg, is $500 per year, less than a latte a day and only about a tenth of the cost of driving.  It’s not nothing, but people have really important stuff to worry about:

  • not having a job at all,
  • being underwater or in foreclosure on your house,
  • not being able to afford a house that doesn’t put you into a two-hour commute
  • not having clean, cheap, humane public transit so you don’t have to drive so much in the first place
  • having your kids in schools that don’t work for them,
  • having your house burned up in Texas or blown to splinters in North Carolina,
  • not being able to get into classes to graduate from college in four years and having to work a full-time job instead of studying to pay tuition, and
  • suddenly having to  tax yourself thousands of dollars a year savings now to pay for future medical care when Medicare has been pulled out from under you by Ryan and his pals if you’re under 55.

Compared to these, $5 gas is pretty small beer, and $3 gas won’t fix any of them.

Actually, $3 gas will make most of them worse. American gas prices are way below the real cost of using the product: oil (only a little more than half of the pump price) is traded in a market that more or less balances the value of using it now or later, but highway taxes are obviously too low (we spend them all and are still stuck in traffic and bouncing on potholes, or at risk of falling through wornout bridges) and there are the externalities of local pollution and global warming we aren’t paying for.  Selling something below its real cost is the root of a host of evils, and these evils are the pure, non-ideological, efficiency type, not distributional or ethical.

When the government gets into “keeping gas prices low” instead of “keeping gas prices at marginal cost”, further evils, and worse ones, sprout. This constitutes government lying to people about how the world really is, and it’s unconscionable, like teaching kids in public school that Adam rode a dinosaur to the office in the morning.  Its what Ugo Chavez and Ahmadinejad do. Our whole political establishment has latched onto this mendacious and irresponsible bread and circuses meme, and it’s disgraceful, the more so as the dinosaurs-in-Eden crowd is getting its marching orders from the “drain America first” folks.

 

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

20 thoughts on “Gasoline prices”

  1. I think this is really a case of bottom-up political corruption. The inverse correlation between presidential approval ratings and gas prices is probably one of the central axioms of American politics. Except perhaps in a handful of congressional districts, talking honestly to the American people about gas prices would end a politician’s career. So I will without reservation tolerate Pres. Obama and the Democrats propagating this “mendacious and irresponsible bread and circuses meme” as the price of not seeing the GOP once again take over complete control of the federal govt.

  2. And, of course, we’ve spent decades building a society predicated on low gas prices – suburban sprawl, bad transit, big cars, etcetera. If instead we’d artificially inflated gas prices when oil was cheap using gas prices, we could have reinforced better long-term behavior and collected some of the money for use subsidizing high-density living (transit, parks, schools, policing, etcetera). Instead, we decided to get the worst of both worlds.

  3. Of course, higher gas prices impose costs, direct AND indirect, (Everything transported by petrochemical fueled vehicles gets more expensive.) on everybody. A $500 a year expense for 50 million households is a hit to society far greater than a few thousand people having their homes destroyed.

  4. NO, Brett. When gas prices go up from too low to correct, the prices of things made/distributed with gas increase, but their costs DON’T change; people who were getting a hidden subsidy stop getting it. If the price of gas changes from underrepresenting its cost to correctly indicating it, all those other things experience the same effect and efficiency increases.

    Um, do you understand the difference between price and cost? Paying everyone $500 a year with the result that they impose more than $500 a year in costs on everyone else is not sound policy. Actually it’s lunacy, like destroying stuff so you can count replacing it in GDP.

  5. “Too low to correct”??? Just because you want gas to be expensive, doesn’t make the price “incorrect” if it’s lower than you like. And to the extent there’s a hidden subsidy, it hasn’t changed by one dime, as the increase in price isn’t going to anything at all you’d describe as an element of that “subsidy”.

  6. Middle aged white men buy gas. Nearly all of them (us — and I bought gas today, in fact). They (we) don’t buy that much else, not so universally anyway. It’s a canary in a coal mine; not the actual gas itself, I think, that accounts to the political significance.

  7. Brett –

    Prof. O’Hare is claiming that an individual’s use of an automobile inflicts costs on others for which they are not compensated (“externalities”). If that’s true, then the best solution would be to compensate the driver’s victims fully at his/her expense. And if we can’t do that for some practical reason, then the next-best solution is to tax the driver with the full costs of his/her behavior so he/she only does it when the benfits out-strip those full costs. Thus, his call for a steep gasoline tax.

    The real problem for Prof. O’Hare is that his logic doesn’t lead to his conclusion.

    Several of the externalities he cites have nothing to do with gasoline–we’d still have to deal with potholes and road congestion if we had fully-electric cars. And the externalities that do arise from petroleum, like greenhouse gases, don’t justify much of a price increase. A typical estimate for the market value of a carbon charge is $35 per ton of CO2 … which translates to roughly 35 cents per gallon of gasoline. We saw a bigger swing between February and March of this year, without much effect on demand.

    I’d be interested to see an analysis of externalities truly atributable to gasoline or petroleum generally) that justified a swing of $2 (i.e., from $3 to $5) per gallon in its price. Or even $1. I predict that Prof. O’Hare would soon be forced into hand-waving talk about reducing US exposure to Mideast unrest … or something.

  8. Passing By correctly notes that a lot of the price of gasoline reflects costs of driving a car no matter what fuels it. When cars were all about the same size and all powered by gasoline, that was close enough to the vehicle-weight-weighted mileage charge that would properly cover congestion and infrastructure costs of driving anything (and diesel fuel includes the same tax). When we have a lot of hybrids and electrics, and someone can figure out a convenient way to tax mileage and vehicle weight I’m happy to unload those costs from the gasoline tax.

    Right, a carbon charge won’t make gasoline dramatically more expensive (though I think $50/t will be more like the right level). But the point of a CC isn’t to make people not drive, or drive a lot less: it’s to make sure all driving creates more value than it consumes. Pushing a vehicle around (as opposed to making electricity or heating a shower) is one of the things for which fossil fuels are best suited. I think the non-climate social costs of going about in cars of any kind are a lot greater than the GHG effect of their fossil fuel use.

  9. Passing By talks about waving hands about expossure to Mideast unrest. I think Mideast unrest is the big gorilla in the room. Gosh, America is in three full blown wars that show no end in sight, in Mideast countries over oil/gas.
    And it’s not like if those wars were resolved in some “favorable” way that the people of the USA would get the benefit of that victory. At least no more than the rest of the world as that oil/gas will all go into the world’s general supply.
    That is not so different from the ‘drill baby drill’ disaster being played out in the Gulf of late. We pay for the externalities and BP/Exxon/Haliburton and friends pocket the profits.
    Someone did a back of the envelope calculation of what the real cost Americans pay for gas is. With war, pollution damage like disease, environmental destruction (real economic as well as quality of life), … Americans are paying about $10+ per gallon of gas.
    Now in Europe people pay more at the pump but much of it is taxes that support infrastucture so they are paying it to themselves. Oil companies don’t squeeze as much profit from europeans because the govenments there don’t let them (those evil socialists). And of course the EU countries don’t have much skin or cash in the Mideast Wars game.
    But here’s a question I never hear asked: If the US wasn’t bombing brown people in the Mideast would there really be any less oil available?
    Energy policy is too complex to examine here (and way above my pay grade) but it would be nice if Team USA had one, outside of “Drill Baby Drill” & “Bomb Baby Bomb”. The truth is that there is energy flowing all around us ready to be harvested and used in more sensible ways. The rest of the civilized world is wading in to figure out how to do that while America thrashes around in a rage like the dumbest kid in the class. And George W. Bush, Dick Cheney, Karl Rove, et al smile.

  10. I should change the name under which I comment here from ‘dave schutz’ to ‘Johnny One-Note’. Themes: Tolls! Road Use Fees! Wave of the Future! Who now remembers John Anderson???!

    There are several problems in the current situation – petroleum is being sold for prices which don’t discourage its use very much. As a result, people face a trivially higher cost for driving alone to work than for assembling a car pool and driving to work in company. Since car pools themselves impose costs (Joe farts and will not shut up about his idiot son-in-law, Sally always makes the crowd wait for four minutes while she goes back into the house for something, Leo’s taste in radio is dreadful, AND it takes fifteen minutes at each end to assemble everyone) people don’t do it. Result: way over four times as much gas gets burned getting the crowd to work because everyone is stuck in the traffic they have generated by driving alone.

    We really need more revenue, to fund the government programs which all polling shows that we want. This is the same polling which shows that we don’t want the debt ceiling raised, nor any increase in taxes. Except maybe on The Rich. Magic solution: Tolls, varying by traffic level. Fifteen bucks to cross the Bay Bridge at rush hour – thirty dollars a day for a person driving alone. Result: you figure out that you can live with Joe and Sally and Leo, each of you pays $7.50 a day in toll, and you magically cross with no traffic, so you save enough time that you are better off than you were driving alone, even with the fifteen minutes on each end.

    The big problem with toll roads in the past has been the time drivers spent waiting at toll booths, which did no one any good, and the wages of toll takers. And if you economized on toll booths, you created incentives for shunpikers. This stuff has been largely solved by gantries which collect car information on modern toll roads – see some of the articles about the Maryland Intercounty Connector. Move the cost of road services provision out of the general tax base and into the cost of driving, and the taxes can be used for, well, schools and intercontinental ballistic missiles and caring for grandma. What’s not to like?

    John Anderson? Let me think, it’s coming to me. Um, didn’t he play tight end for the Rams, maybe ten years ago?

  11. And, again, it comes down to simply wanting to spend more money.

    However, I agree on toll roads; Libertarians have been advocating toll roads for decades now. The tech is to the point where you don’t need toll booths, AND it would be fairly easy to hack together a system which simultaneously billed everybody correctly for the amount of road wear they caused, (This would have a huge impact on trucks, they cause almost all of the road damage, not passenger vehicles.) provided detailed road usage reports which PM could be based on, AND didn’t allow for tracking of individuals.

    I suspect the main objection liberals would have to such a system is that, if the tolls were actually properly priced, it WOULDN’T do much to discourage driving…

  12. Brett, it’s not so much that I want to spend more money, as that I want the money we spend raised in taxes at the same time we spend it. Borrowing means that our children get the bill for our self-indulgence now.

  13. Borrowing is a way of spending more than the public would tolerate in the form of taxation. IIRC, federal taxes have never, for more than a brief interval, exceeded 19% of GDP in this country. (Combining all levels of government, perhaps 25-30% of GDP.) That seems to be the limit of public tolerance outside of existential emergencies. Balancing the budget at current spending levels would require the federal government’s take alone to reach something like 30% GDP. Total taxation over 40% of GDP.

    Mind, there ARE countries where taxation reaches those kinds of levels. But US taxation has never been remotely near them. Is it all that “reality based” to think you’ll change that?

  14. gas taxes in the u.s. are the smallest in the developed world which not only deprives our government of revenue but also means the government has little impact on the price of gas. i suppose if india and china were willing to slow down their growth rates for a decade or two we might have more elasticity in the price of gas but otherwise it’s all kabuki.

  15. Dave Schutz: I’m with ya, but we have a large fraction of our built environment that developed under old assumptions, thus it is now inefficient and dependent on soon-to-be-expensive transport ideas. Even if you want to toll local access roads in hopes some households move to more efficient areas (if, somehow, they could sell their house), then that more efficient area has to absorb wastes in an inefficient pipe and deliver water in a likely old pipe subject to breakage (an inefficient system all the way around). IOW: our built environment in the US is a mess.

  16. Look, a toll road system which honestly priced road usage, instead of attempting to punish people who drive more than some people think they should, probably would NOT effect driving patterns much. It’s main effect would be to discourage overloading of trucks; Most road maintainance is driven by over-loaded trucks damaging road beds, not wear from passenger cars.

  17. Rather than dismissing that $500 a year (or, more realistically, $1000-plus for a two-adult family with two commutes) as negligible, it might also be useful to think about what a dickensian state so many US households are in, where an extra grand of unbudgeted expenditure is quite enough to make hash of people’s lives and plans. How we got there is pretty clear, how we might get out is not. (And yes, it would certainly take more than cheap gas to ameliorate the situation.)

  18. Unlike most of the other calamities mentioned by Prof. O’Hare in the body of his article, a gas price shock is a) rapid-onset and b) nearly universal. (There are many adults who don’t drive, but the number of people who maintain their own cars is much larger than any of the groups identified.) That’s one of the reasons that gas price shocks are so visible.

  19. That’s one of the reasons that gas price shocks are so visible.

    The main reason is that so many people live in auto-dependent areas. No choice but to drive.

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