Rising Gasoline Prices-BECKER

The causes of the sharp increase in gasoline prices during past year and a half are clear. The main ones are the rise in the price of oil to over $70 a barrel, and the lack of unused capacity in oil refineries that makes it difficult to increase gasoline production. Since refineries pollute and are generally unpleasant to have in one's neighborhood (the NIMBY, or Not in My Back Yard, mentality), political opposition prevented any new refineries from being built in the United States since the 1970's. We are reaping the consequences of that opposition. Gasoline prices have risen by about $1 during the past year to almost $3 a gallon. This is a very large increase over a short period of time, but it should be put in perspective. Spending on gasoline by the average household has risen from about 2% of its total consumer spending to a still low 3%-it reached over 41/2% of personal consumption spending in 1981. The real cost of gasoline, adjusted for changes in the price level, is less than in 1981. Since a typical family has a higher real income than it did 25 years ago, the burden of high gas prices is easier to bear now than at that earlier time. The higher price will pinch for families who commute long distances to work in their SUV's, but the price of gasoline does not have a major effect on the many poor families who take public transportation to work. Most of the other economic consequences of higher gas prices are beneficial to a world concerned about an over-dependence on Middle East oil producers. They induce consumers to drive less and to shift toward more fuel-efficient cars. They encourage politicians to worry about why American refineries have not been built for over 30 years, and to remove some of the regulatory obstacles. High oil and gas prices encourage the hunt for additional sources of oil in shale and tar pits, and give researchers greater incentive to search harder for alternatives to the gasoline-powered internal combustion engine, such as electric powered engines, fuel cells, ethanol, and other alternatives. On the other hand, many potential political consequences of high gas prices are worrisome and even scary. As Posner indicates, the proposed $100 rebate to taxpayers would help many well-to-do families, and have a minor effect on families that have been hard hit by the rise in gas prices. Perhaps even worse are the proposals to investigate whether oil companies have conspired to raise gasoline and oil prices. No one mentioned any oil conspiracy when real gasoline and oil prices declined significantly during the 1980's and 1990's. Stagnation in the number of American oil refineries, the havoc caused by Katrina to refineries in the Gulf, rapidly growing world energy demand, and disruptions in the world supply of oil during the past year are sufficient to explain high gas prices without any conspiracy theory. I doubt if "excess" profits tax on oil producers will be introduced, but even the suggestion to do that is disturbing. It is related to, although different from, the oil "windfall" profits tax in effect during most of the 1980's. Profits of oil producers are volatile, and were depressed during the 1980's and '90’' when oil prices fell a lot. Higher profits encourage greater investments in looking for new oil reserves, while governmental restrictions on profits discourage the search for new oil sources that are crucial to controlling oil prices in the longer run. I do believe Congress should roll back the some $2 billion in tax breaks given to oil companies last year. They never should have been given in the first place, but these benefits mainly reflect the political power of the oil industry, a power that is at least temporarily in retreat. One of several better ways to encourage oil production in North America is to open the Northern Alaskan region to oil production; President Bush has proposed that once again. The advisability of raising taxes on gasoline, supported by Posner, is not so clear, even aside from the political impossibility of increasing taxes when gas prices are high. One disadvantage of higher taxes is that they partly offset the incentives provided by high gasoline and oil prices to invest in new sources of oil, such as shale, that reduces dependence on Middle Eastern oil. Federal, state, and local governments of the U.S. combine to impose taxes on gasoline of about 60 cents per gallon. Studies by Resources for the Future suggest that this is more than adequate to cover all effects of pollution, aside perhaps from some larger estimates of the effects of gasoline consumption on greenhouse warming. The purpose of gasoline taxes is to cut consumption by raising gasoline prices to consumers, but the $1 increase in gasoline prices during the past year has cut gas consumption. These higher prices, if they stay, will cut gasoline usage much further as consumers have more time to adjust their behavior. If the optimal tax on gasoline was $1 when gasoline sold for $2, the effective tax is now $1.60: the 60 cents imposed by governments and the $1 increase due to market forces. So, if anything, this argument suggests that gasoline taxes be reduced rather than increased while prices are so high.

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