Friday, May 2, 2008

Eco-nomics: Gas Prices

I almost bashed in my car radio this morning when I heard Scott Horsley on NPR this morning suggest that the proposed gas-tax holiday would indeed lower prices at the pump (yes, I was driving my car and consuming gas). The host, Steve Inskeep, was clearly expecting him to say the opposite as he asked (and I paraphrase) 'but will consumers really see a decrease in prices at the pumps?'

I agree with Steve, I am not so sure and many others agree: Greg Mankiw, Paul Krugman, Dean Baker are among quite a few economists who think it is likely to have little or no affect on the price at the pump. Come on Scott, do a little homework!

Anyway, do we even want the price of gas to fall? The wonderful thing about gas prices (and yes they hurt me too - especially when I also have to wait for someone to pump my gas) is that they provide clear incentives to try and conserve on fuel. And guess what, it's working! One need only to spend a little time in Europe to understand the impact of high fuel costs has on individual consumption: smaller, more-fuel efficient cars are the norm, not the exception. Isn't this what we want: more energy independence, lower emissions, fewer greenhouse gasses released into the atmosphere? John and Hillary need to drop this proposal - it is just dumb (though probably effective as a bit of campaign rhetoric).

Which brings me to another topic: what to make of the giant SUV hybrids? One argument is that a small gain in fuel efficiency in a large SUV is better than a large on in a compact car. Example: two cars that drive 100,000 miles. One, big, gets 16 MPG and the other, small, gets 30 MPG. Improving the former's fuel economy by 2 MPG to 18 saves 694 gallons of gas, while improving the latter's fuel economy by 4 MPG to 34 saves 392 gallons of gas. But the other perspective is that the big car will burn 5556 gallons along the way, while the little car burns 2941. So if your policy goal is to reduce carbon emissions and oil consumption, it is pretty clear: try and promote consumption of the smaller car, not make a hybrid for the bigger one.


Jeff Alworth said...

And another public policy issues is the collateral damage those big vehicles do to roads, bridges, and the things a small percentage inevitably collide into. Gas is only a part of their cost.

Jeff Alworth said...

"issue." Sorry.

Anonymous said...

Apparently the Chevy Tahoe/GMC Yukon hybrids work well (according to my preferred authority: Car and Driver).

However, I wonder whether they will actually sell any.

If you can afford a $55,000 truck (which you presumably need for towing things), are you likely to care all that much about gas prices?

On the other hand, I think that hybrids make a lot of sense, especially for city driving, and I wish Chevy/GMC the best....

Except for one thing -- Chevy/GMC has stuck a gigantic "H Y B R I D" decal on both sides on the vehicle. IN ADDITION to a badge that says the same.

It looks rather juvenile -- much worse than all the silly things that some cars were adorned with in the 80s:
"fuel injected"
"5 speed"

jessibeaucoup said...

The gas tax holiday rhetoric is crazy. The idea has been widely panned by many economists and can be clearly explained, as you did, in simple terms. I'm constantly amazed at how people will vote against their best interests based on political rhetoric that, in this case especially, is incorrect (at best) or dishonest. Give the average voter a gas tax holiday that will put zero dollars in their pocket and they're for it. Propose increasing or eliminating the cap on FICA and they're against just in case they someday get to earn enough to have it impact their pocket books. Soap box done;).

JEM said...

Don't you know that Hillary doesn't need "experts" like you telling her what will and won't work??

chris farrell said...

Clinton isn't stupid. She must understand this stuff.

Anyway I too theoretically know that high gas prices are the way to go as far as starting to explore alternatives. However, since there are no alternatives to the car right now, I am suffering. I have to drive to Salem once a week. There are no buses, and no trains. I guess I could hitchhike.

I've been saying for years that taxing gas at a higher rate is the way to go. That way, the money stays here instead of going to Saudi Arabia, and investors in alternative fuels have confidence that the price of gas will stay high.

Plus there should have been public support of buses and trains.

The whole gas tax issue is ridiculous. Obama scores one for not sinking down to that level.

Jmartens said...

Agreed, this tax holiday concept is absurd! I hear the federal tax is $0.18 per gallon. The Obama camp says that a tax hiatis would only save the average American about $25 this summer.

I'd prefer we spend our time on a long term solution, not a $25 three month solution.

Shameless self promotion: I just wrote a post this morning about all the different gas formulations that are required in the US. Thats an area that politicians CAN make a difference.

Fred Thompson said...

I have seen plausible estimates that the incidence of the gas tax is more or less equally shared between consumers and the oil companies. If true, that means a tax holiday would reduce the price at the pump 5-10 cents per gallon and increase oil company profits by about the same amount. The short run increase in consumption would be small, maybe .2-.3 percent. But, legislating a tax holiday would also give Congress the opportunity to revisit long-term rates, perhaps, making the federal gas tax an ad-valorem tax or designing a mechanism that would stabilize the price at the pump at current real levels, which would over a period of 10 years cut total gas consumption per capita in half.

Holding weather damage constant, highway damage is a quadratic function of vehicle speed and axle weight divided by tread area. Consequently, it is not evident that SUVs and pickups do substantially more damage to the roads per mile driven than compacts or even most subcompacts.

The State Department of Transportation experiment with the use of weight-use mile taxes monitored by GPS transponders shows what we could do to replace the state gas-tax with something a lot more efficient and price (the system could also be used to enforce congestion tolls and include an income-contingent rebate to offset the regressivity characteristic of consumption taxes).

Patrick Emerson said...

Investing more in public transportation must definitely be a high priority right now. I agree, a much better way to address the problem in the long run.

I believe that supply is not inelastic in the long-term, but I do believe it is in the short-term. Thus estimates of equal incidence and elasticity that look over a long time series of data (which are by the way in the past so might not be relevant today) I don't think are too informative of what a temporary tax holidy will do in the summer of '08.