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June 26, 2007

The Price of Gasoline SHOULD Go Up

To listen to the comments and watch the actions of lawmakers on both sides of the aisle, the biggest energy problem facing America is neither a dangerous dependence on foreign oil or rising carbon dioxide levels from burning fossil fuels; it’s the price of gasoline at the pump.  Hopefully our lawmakers are not really that stupid and are just pandering to how stupid they think we are.

Actually, LOW gasoline prices are part of the problem.

Here’s are two quotes from a New York Times article on Senate passage of an energy bill:

Senator Jon Kyl, Republican of Arizona: “Instead of reducing gasoline prices, this is going to add to add to the cost of gasoline.”

Harry Reid, Democrat of Nevada: “Republicans repeatedly demonstrate that they do not care about the priorities of the American people, throwing up roadblocks at every turn instead of working with us to reduce skyrocketing gas prices.”

The bill that passed raised car mileage standards more than the auto industry wanted and apparently more than it expected. It’s politically acceptable to raise the price of cars but not acceptable to raise the cost of driving at the pump.  That’s because we fill the tank more often than we buy a new car.

The bill didn’t tax the oil industry the way that Democrats wanted to in order to raise money to subsidize alternative energy sources.  According to the Times story: “Oil executives and their lobbyists had fanned out across Congress in recent days and run frequent ads in newspapers, all delivering a carefully coordinated message: higher taxes on oil production would lead to higher gasoline prices.”

Actually, I’m not sure that’s true.  The price of crude oil is set on a world market; it is currently well above the cost of most extraction.  Higher taxes on producers won’t – immediately at least – make oil any scarcer so there’s not much reason to think the price of oil-derived products would run up.  That’s a negative, of course, if we want to discourage consumption.

However, it doesn’t make much sense to put the burden of tax on oil companies which are domiciled here or are drilling here if we want to increase domestic production in order to reduce imports.  Although much less politically popular, it makes more sense to raise gasoline taxes at the pump.  That will make the price of gas go up; that will discourage consumption; that will make alternative fuels more attractive; that will encourage consumers to buy more gas efficient cars and/or drive less and/or drive slower.  Eventually, all of that will reduce oil company profits but that’s not the goal no matter how emotionally satisfying it might be.

Suppose we were to raise the tax on gasoline and diesel used as motor fuels by $.50/gallon every six months for the next three years.  We could immediately end the $.50/gallon subsidy to ethanol producers without discouraging production.  We could remove the stupid restrictions on importing ethanol made from sugar since there’s be plenty of demand for both foreign and domestic ethanol.  We could stop the tariffs which protect the sugar growers as they find a market – as corn has already done – as a fuel source.

Even more expensive biofuels would become economical without subsidy.  The government could stop playing the pork barrel game of trying to decide which alternative fuels to subsidize how much and let the most efficient producers replace gasoline.

Putting aside the politics, there are still two enormous problems with this proposal:

  1. The tax is extremely regressive – the working poor pay much more of their income in gas tax than the rich.
  2. The government will withdraw huge sums from the economy and legislators’ll invent vote-buying programs to spend it.

Both problems could be solved, however, by reducing or eliminating social security taxes – also regressive – at lower income levels, maybe after keeping a little of the surplus to make sure that social security and Medicare are actually funded for when the baby boomers retire.

BTW, higher gasoline prices are not a panacea – just a help to more rational energy decisions.  I was just in the UK where fuel prices are about twice what they are here.  The average car did seem to be smaller.  However, people were driving faster where traffic allowed (very fuel inefficient).  London has enacted a congestion fee for entering downtown by car; the city was choking with cars despite high fuel prices.

Related post:  the non-partisan Congressional Budget Office recommended for raising the gas tax and against raising fuel economy standards. Here’s why.

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