Jun 08 2008
Gas Price Floor Should Be Set At $4 A Gallon
Published by Steve Latter at 5:22 am under
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WikipediaAt $4, Everybody Gets Rational – Washingtonpost.com
Here is another excellent gas price article containing accurate economic principles.
Yes, the non-economist (ie, average citizen) doesn’t get it on how higher gas prices will ultimately lead a nation’s economy to conservation, energy independence and efficiency in the long run.
Hey, I’ll be honest: I don’t like higher gas prices any more than I do going to the dentist, but I am glad they are rising as I see and read about SUV purchases falling off a cliff, driving habits changing right before my very eyes, and the quantity demanded for gasoline falling fast.
By CHARLES KRAUTHAMMER | Posted Friday, June 06, 2008
So now we know: The price point is $4.
At $3 a gallon, Americans just grin and bear it, suck it up, and, while complaining profusely, keep driving like crazy.
At $4, it is a world transformed. Americans become rational creatures. Mass transit ridership is at a 50-year high. Driving is down 4%. (Any U.S. decline is something close to a miracle.) Hybrids and compacts are flying off the lots. SUV sales are in free fall.
The wholesale flight from gas guzzlers is stunning in its swiftness, but utterly predictable. Everything has a price point. Remember that “love affair” with SUVs? Love, it seems, has its price too.
America’s sudden change in car-buying habits makes suitable mockery of that absurd debate Congress put on last December on fuel efficiency standards. At stake was precisely what miles-per-gallon average would every car company’s fleet have to meet by precisely what date.
It was one out-of-a-hat number (35 mpg) compounded by another (by 2020). It involved, as always, dozens of regulations, loopholes and throws at a dartboard. And we already knew from past history what the fleet average number does.
When oil is cheap and everybody wants a gas guzzler, fuel efficiency standards force manufacturers to make cars that nobody wants to buy. When gas prices go through the roof, this agent of inefficiency becomes an utter redundancy.
At $4 a gallon, the fleet composition is changing spontaneously and overnight, not over the 13 years mandated by Congress. (Even Stalin had the modesty to restrict himself to five-year plans.)
Just Tuesday, GM announced that it would shutter four SUV and truck plants, add a third shift to its compact and midsize sedan plants in Ohio and Michigan, and green-light for 2010 the Chevy Volt, an electric hybrid.
Some things, like renal physiology, are difficult. Some things, like Arab-Israeli peace, are impossible. And some things are preternaturally simple. You want more fuel-efficient cars? Don’t regulate. Don’t mandate. Don’t scold. Don’t appeal to the better angels of our nature. Do one thing:
Hike the cost of gas until you find the price point.
Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians and Iranians do the taxing for us — and pocket the money that the tax would have recycled back to the American worker.
This is insanity. For 25 years and with utter futility (starting with “The Oil-Bust Panic,” the New Republic, February 1983), I have been advocating the cure: a U.S. energy tax as a way to curtail consumption and keep the money at home.
In May 2004 (and again in November 2005), I called for “the government — through a tax — to establish a new floor for gasoline,” by fully taxing any drop in price below a certain benchmark.
The point was to suppress demand and to keep the savings (from any subsequent world price drop) at home in the U.S. Treasury rather than going abroad. At the time, oil was $41 a barrel. It is now $123.
But instead of doing the obvious — tax the damn thing — we go through spasms of destructive alternatives, such as efficiency standards, ethanol mandates and now a crazy carbon cap-and-trade system the Senate debated last week. These are infinitely complex mandates for inefficiency and invitations to corruption. But they have a singular virtue: They hide the cost to the American consumer.
Want to wean us off oil? Be open and honest. The British are paying $8 a gallon for petrol. Goldman Sachs is predicting we will be paying $6 by next year. Why have the extra $2 (above the current $4) go abroad? Have it go to the U.S. Treasury as a gasoline tax and be recycled back into lower payroll taxes.
Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand — and bring down world crude oil prices — the American consumer and the American economy reap all of the benefit.
Herewith concludes my annual exercise in futility. By the time I advocate the tax floor again next year, you’ll be paying for gas in bullion.
About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics,
Accounting, Marketing, and Personal Finance.
Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 10 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe. Related posts:
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Amen brother. I hate to keep talking about gas and oil prices, but this time we’re is an interesting case study in consumer behavior. The kind of economic data we’ll posses in a few years from today’s environment is going to fuel (no pun) the research for the next generation of economists.
I don’t agree on the gas floor though. Extreme price fluctuations are fun to watch for those capable of riding the waves.
This article is a fascinating topic. I think the world would go into a major “culture shock” if we raised the price of gas but I think it would have a negative effect on the economy. If gas is raised then people would need to cut back on their travels and other expenses. The majority of Americans would stay at home and avoid excess spending therefore causing the economy to suffer. I think that $4 is a fair price though as seen when compared to $6 or $8 in other countries. But I feel that the country would retreat and could cause a suffering in the GDP.
I found the fact that Goldman Sachs was looked as a reliable source to be ironic due to their hardships in the news. But I feel that they are accurate that gas will go up. The fact that gas is lowering every time I drive home from PVI to be misleading because of the election. I always hear that gas is lowered because of the election but I don’t understand why. I do know that the economy is suffering and it confuses me that gas is lowering. Why is that?
Hi Joey,
Gasoline is falling in price right now because oil, the main component of gasoline, has fallen from $147 per barrell to under $80 per barrell since the summer.
The huge decline in oil prices is thought, by most, to be due to a combination of two factors:
1) the $147 price per barrell was artificially high as an “oil bubble” developed as purchasers overinflated the price of oil thinking that they would buy oil contracts before they rose even further (we call this “speculation”), and
2) the global recession we are now in will cause/is causing the demand for oil to decline (shift left in demand, remember?) as incomes will/are falling.
I think setting a price floor for gas would be “unfair”. Urban people would probably not suffer at all because they have public trasportation. But the more rural you live, the more you depend on your own transportation. And the further away you live from the next grocery store, post office or movie theatre, the less substitues there are for a car. In places where there are no substitutes yet, the price of gas should, in my opinion, not be raised by a tax.
This topic was especially hot during the recent Presidential election. Now that it is over I am perplexed that Obama’s plan is to provide “short-term relief to American families”. I don’t see how an energy rebate of $500 per person and $1000 per married couple will help anything. He also wants to encourage oil companies’ production through a “use it or lose it” approach, in which oil companies who don’t drill on available land will forfeit them to competitors. It seems that he wants to prolong the inevitable rather than preparing for the change that is destined to come.
[...] floor on gasoline. Several months ago, my colleague and fellow blogger Steve Latter blogged about a proposed price floor of $4 per gallon on gasoline. Such a scheme would likely prove nearly impossible to initiate politcally, but may be exactly [...]
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