Thursday, June 05, 2008

High Hopes for High Gas Prices

“Painful though it is, this oil shock will eventually spur huge change. Beware the hunt for scapegoats”The Economist

This quote pretty much sums up what I think about high gas prices. With gas prices most likely reaching a $4.00 national average by June 30th and the general election getting underway the politicization of gasoline prices is only going to increase.

The only reason I can confidently say why prices are increasing is because extra people want the gas, but no extra people are producing it. The low prices of the 90’s are partially responsible for very little future investment in oil production. The other reason why we are lacking oil supplies is that governments, like our own, restrict who, where, and when companies can drill. So what are the solutions?

As a blanket statement, I can assure you that the gas tax holiday is not a good idea. There is a reason that Hillary could not find an Economist to support her idea. Even though Hillary is out of the race, McCain has also supported the idea. So I think it's worth explaining why removing the gas tax is a bad idea:

1.) By removing the gas tax, you will only encourage more driving, putting more pressure on the already limited supply, thereby increasing the real price of gas.
2.) This increase in oil purchasing will send the tax reduction money to the oil companies, not individuals.
3.) Gas prices are a fairly efficient tax to pay for road construction and maintenance. It semi-accurately charges customers based on their use. The more you drive, the more wear and tear you inflict on the roads.
4.) As usual, this is a tax reduction without a spending reduction. The money that once went to pay for the roads will be gone. Clinton’s proposal to make up for the missing money was to tax windfall profits of oil companies. I cannot think of anything worse to keep the industry from innovating.
5.) The United States already has one of the lowest gas taxes in the world.In fact, the only reason I can see to support this idea is that it may be the better of two evils. Bryan Caplan suggests that in the grand scheme of bad political policy, costing the tax payers 18 cents may not be a bad trade off. With talks of nationalizing the industry, which sounds scarily like something from Cesar Chavez's playbook, I’d be willing to pay 18 cents to keep the industry out of the hands of politicians. Hopefully it will never come to that.

There is even evidence in the private sector that the gas price crisis may not actually be. Chrysler is offering gas at $2.99 with all qualifying 2008 and 2009 models. It seems they are banking that people are blowing the costs of increased gas prices out of proportion.

So are we just supposed to take these prices lying down? Well, maybe. As for the short run, there aren’t any quick fixes. Asking Congress to fix the price at a certain level is like asking them to disconnect your thermostat. It is still going to be expensive. If you hold the price at lower than market, you will simply pay for it in less efficient ways, like waiting in line (or worse through political favors).

But there is good news. As prices change, people respond to them. Whether it ditching your tractor for a mule, switching to smart cars, or having American’s drive 11 billion miles less this March as compared to last March, the price system is working and people are responding. It’s even helping the environment. In fact, my hope is that this will lead to earth friendly innovation in how we produce our energy.

This is by no means and exhaustive review, as always, comments and critiques are always welcome. To end on a light note, here is Stephen Colbert’s solution:


  1. Well said. Viva la revolution!

    Mark my words though - the only innovative solution is nuclear energy.

  2. The Economist thinks so too:

  3. Uh oh, looks like you have some dissenting economists:

  4. Justin,

    Thanks for the pointer to the Fortune article. I appreciated the economic sensibility of the author. However, I remain unpersuaded by his arguments. One of the elements of all bubbles, manias and frenzies is speculation about continued future growth in value. People bought tulips in the Dutch mania of 1636-1637, not for their intrinsic value, but for their belief that it was an "investment" that would continue to rise. The Fortune article, although pointing to the kind of investment you would expect to see when prices and profits rise, fails to reveal who the parties are that are "speculating" on future price increases. Who is buying oil and holding on to it to sell at a higher price later? There may be an answer but it is not clear from the article. Speculation and investment are not the same thing.


  5. I really liked the article you linked Justin and I think it had a lot of good stuff to say. What I'm not sure is when the author thinks prices will fall again. If he thinks it's something like next month he's probably wrong. I think Steve is right that this speculating will keep prices high, but not forever. I just assumed it would take like 10 years to build all the new drills and refineries (whatever it takes to produce usable oil) then the price would go back down to cost. My hope was in that time new technologies would help ween us off polluting energy sources.

  6. Parker10:10 PM

    you mean high hopes for low gas prices right?

  7. Nah, I have high hopes for what will result out of these high prices. It has resulted in people using less oil (responding to the high prices) and more investment in "greener" forms of energy. Now I no hippy, but if we are harming the enviroment, I'm up for harming it less.


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.