Gasoline prices

News reporting on gasoline prices is like Entertainment Weekly writing about the latest blockbuster movie: whatever's happening now is the biggest thing ever, more expensive than Cleopatra and grossing higher than Gone With the Wind. When the movie industry refuses to acknowledge inflation in its comparisons, we generally understand that it's for the sake of hype and promotion. When the news does it though, sometimes people miss the hype aspect and instead think we're in a Crisis, which of course means that the government needs to Do Something.

First, let's get out our apple and at least try to compare it to another apple. The current U.S. average price for regular unleaded (at the pump) is $2.236 per gallon. The major historical post-WWII price peak is unquestionably the period from 1979 to 1981. In 1981, the consumer price index was about half what it is today, putting the price then at about $2.69 a gallon in inflation-adjusted dollars. Furthermore, it has been pointed out to me that we are considerably wealthier now a generation later, even in inflation-adjusted terms, which implies that gasoline is not as big a part of the average family's budget as it once was. In economic lingo, "energy use per dollar of gross domestic product" has declined by more than one-third since 1980.

To people who remember the seventies, this should make intuitive sense. Back then, there was a broad shift into more fuel-efficient vehicles that reflected the significant impact of the higher prices on people's budget choices. These days there is also a shift into new, efficient vehicles, but it is qualitatively different in that people are doing it "for the environment" rather than for their wallets. I have yet to meet the person who has purchased one of these twenty thousand dollar road-gerbils (e.g. Toyota Prius) and justified it solely on financial grounds. As a corollary I will note that I am not seeing a falloff among SUV and light truck drivership, which one would expect if gasoline prices were creating widespread fiscal woes.

Additionally, I would like to cite an anecdotal indicator. Anybody remember locking gas caps? My family purchased and used a number of them in the early 80s after somebody siphoned gas from one of our cars when it was parked in our own driveway. The thief used a cheap garden hose as a siphon, leaving disintegrating fragments of rubber as his calling card. Anyway, the absense of a resurgence in locking gasoline caps strikes me as an anecdotal indicator that the value of gasoline now is still considerably lower than the value it attained in 1981.

Even so, I understand and accept that the cost of gasoline is higher than recent historical averages. When I have to pay sixty dollars more per month as compared to two years ago to do the same amount of driving, I do notice it. But is this relevant to anything the government could or should do in the near term? From my perspective, that depends on whether or not the government is creating the problem of higher prices in the first place. When it is, I'd generally prefer that the government knock it off. When it isn't, I'd generally prefer to allow market forces to bring things back in line.

Consider on one hand the issue of "boutique fuels," a slang name for special, federally-mandated gasoline formulations in certain ozone "non-attainment areas" (southeast Wisconsin being one regional example). This topic alone could be the subject of numerous argumentative blog postings, but there seems to be little question that these special reformulations (being of lower volume in production) are far more prone to price spikes due to supply disruptions or demand miscalculations. Over the years this has resulted in hundreds upon hundreds of millions of dollars in additional cost for people to drive, all for a supposed environmental benefit that I would call "elusive" at best. This, I believe, is one place where the government could do good for both citizens and gas prices by stopping its meddling.

The subject of drilling in the Arctic National Wildlife Refuge is another that tends to arise in conjunction with oil price discussions, but it's almost a non-sequitur in that it will take years for that production to ramp up enough to put a dent in prices. I think it's a fine place to get oil from, and I'd rather have Alaskans receiving my petrol dollars than Prince Akhmed (Inuits not figuring prominently on al-Qaeda's donor lists), but the issue is just not relevant to near-term price concerns.

What about cutbacks or suspensions of state and federal gas taxes? This is an idea that sounds straightforward, but is actually fraught with twists, turns, and unintended consequences. The current federal gasoline tax is 18.4 cents per gallon, and Wisconsin's tax is now up to 32.9 cents per gallon as of April 2005 (segregated into a 29.9 cent portion and a 3.0 cent portion, the latter of which is slated for environmental cleanup of petroleum-contaminated lands). A break in state gas taxes would actually result in a direct reduction in prices at the pump; of that I am reasonably certain. The only thing to worry about in that case is whether the state legislature would simply forego that tax revenue and spend less money (dubious), or whether they'd instead find a way to tax you from a different angle.

With federal taxes on the other hand, a tax reduction would probably result in little or no price reduction at the pump. Why is that? Unlike instituting a price break that would affect only Wisconsin motorists, a gas tax reduction nationwide would result in a nationwide demand rebound, which would raise the price back up, and the price would be at equilibrium again pretty much where it was before the tax break. Put another way, the U.S. Treasury would simply be transferring what used to be tax dollars into oil company profits. That's not necessarily a bad thing in the long term, but there is no short-term benefit to the driving public, and we were talking about the short term here.

If one accepts that gasoline taxes are a prudent and legitimate way for the government to raise money from us, does the abovementioned price dynamic suggest an optimal policy over longer periods? Though it strikes me as counterintuitive, times of high prices may be the best time for a federal gasoline tax to be increased. There are several reasons for this: (1) The times of high prices are when the oil companies earn larger profits. Siphoning off money from oil companies to the government is less harmful at such a time. (2) The times of high prices correspond to the periods when fewer gallons get sold. Raising the per-gallon tax flattens out gas tax revenues year to year. (3) If there is any spillover at all of the increased tax to the pump price (and there should be little, if any), such increase would merely reinforce the market dynamic, at least on the demand side. (Admittedly, the supply-side in this case is not at full advantage because some of the profit dollars for increasing exploration and production are being redirected to the government).

Of course, implementing such a policy also demands that the tax be reduced when there are oil gluts. The tax reduction would be for the reciprocal reasons: that the oil companies are seeing lean times, overall revenues are rising on more gallons being sold, and so forth. I will dryly note though that historically, governments have been less than trustworthy in maintaining any uniform level of taxation over the long term. Also, I cannot readily envision a populace that would support their lawmakers as they raised gas taxes during times of already high prices. Hence this policy concept is entirely whimsical, ready for implementation on Planet Never.