Wednesday, April 30, 2008

Gasoline Prices

According to an article on MSNBC Online, the most important issue on America’s mind this election (at least at the moment) is high gasoline prices. People want the government to do something to lower the price of gasoline. And candidates are responding with plans to lower prices – mostly by lowering or suspending the government’s tax on gasoline during the summer.

The problem with this scheme is that, if the government eliminates the tax, then demand will increase. Increased demand (without an increase in supply) means that the price will go up to where demand equals supply – which is about where the price is today. Meaning, the result of this move is that the money that would otherwise go to the government, will go to the oil companies instead.

Ultimately, however, the moral problem here is that the actual cost of gasoline is much higher than people seem willing to pay. Those who argue for gas prices to be lower are advocates of a system that tax the poor and tax future generations - making them worse off - so that they can drive their vehicles. The people who are forced to suffer the costs are those who do not have a political voice. They are starving in another country where they cannot afford food, or they are members of a future generation too young to vote or not yet born.

Fossil fuel consumption is the leading contributor to global warming. Global warming is a subsidy – a 'wealth transfer scheme' - that transfers wealth away from those who will suffer its ill effects (future generations) to those who are causing the problem. Future generations will pay that cost in terms of the destruction of coastal properties, higher death rates due to extreme weather, disease, and and heat-related deaths, loss of property, and even the destruction of whole (low-lying) countries. If we were to pay for the gasoline we used ourselves – pay an amount that would compensate future generations for the harms we will otherwise force them to endure, we would be paying far more than we do now.

The best way to force people off of gasoline (and fossil fuels in general), and onto alternatives such as walking, riding a bike, using public transportation, buying locally-produced goods that do not need to be shipped half-way around the world, is to raise the price. There is no better incentive for getting people to reduce the amount of an activity than by making it more expensive to do so.

Unfortunately, this solution comes with another problem. It is problem that I discussed even in the first days of this blog. The very wealthy (the ‘aristocracy’) has the power to bid essential goods and services away from the poor.

I illustrated this problem in the days after Hurricane Katrina hit in discussing 'price gounging' accusations against people charging as much as $20 for a bottle of water. John Stossel argued that ‘price gouging’ was a good thing – that high prices helped to ensure that water was going to its most highly valued uses and not to lesser-valued uses (uses for which people were not willing to pay $20 per bottle).

I told a story about two women bidding on a bottle of water. A poor woman wanted the water in order to give it to her sick child. A rich woman wanted the water to use it to shampoo her pet poodle. In the free market, $20 to the rich woman has a significantly lower 'opportunity cost' than $20 for the poor woman. The rich woman has stacks upon stacks of $20 that she can spend on other things – the loss of one $20 bill is insignificant. The poor woman has very few $20 – the loss of one is extremely significant.

To accurately measure which use has the higher value, we have to imagine who would bid the higher price if $20 had the same value to both people – who would pay the most if both people had the same amount of wealth. If the poor woman would have out-bid the wealthy woman if their levels of wealth were equal, then hers is the higher-valued use. In this type of case, 'free markets' take goods and services away from their more highly valued use, and give them to their less highly valued use.

Gasoline (and fossil fuel consumption in general) is a product where the rich can bid the resources away from the poor, who would put it to a more highly valued use. Filling up an SUV several times a week does not have much of an opportunity cost for those who have stacks of $20 bills to spend. For such a person, gasoline is still 'next to free'. It is only the poor who are suffering from the higher price of gasoline – people for whom the loss of $20 means less money to buy food, clothing, or pay the rent.

Now, we also see the aristocracy bidding food itself off of the tables of the poor. The case I started with of the two women bidding for water explains the current situation. Rich people are buying up food to use in ethanol production. Food prices are going up. This is morally identical to the case of the rich person bidding water way from a person who would give it to a sick child, so that she could use it to shampoo her poodle. The difference – the rich are bidding food away from the starving, rather than water away from the thirsty.

So, this must imply that I am in favor of abandoning the market because of these flaws, and go with government solutions, right?

Let’s not lose track of the one thing that markets are really good at. Prices store a great deal of information, and they instantly connect that information to behavior. You have a village operating under market conditions. The food crop fails. Instantly, the price of food goes up – telling people that (1) they need to start using less food immediately, (2) they need to look for substitutes for food where food is being used for things other than eating, and (3) they need to go out and find more food. It provides instant incentives for people to start acting in ways that will mitigate the harm of the crop failure.

If the government, instead, struggles to keep the price (artificially) low, we will suppress the instant incentive for reducing consumption, searching for substitutes, and searching for additional sources that the market gives us. Governments are notoriously slow at responding to new information – and their response is corrupted by the noise of special interest groups.

This is my fear with respect to the claim that the most important concern in America is with the high price of gasoline. Government action to keep the price (artificially) low would serve to keep the consumption of fossil fuels (artificially) high. It gives people less of an incentive to cut back on their consumption, to look for substitutes, and to look for new sources. It makes the problem much worse.

More importantly, this type of government interference simply increases the tax on the poor or on future generations who do not have a vote in today’s elections – further taxes the poor to enefit the rich.

(Yes, in the world economy, the average American is considered 'rich'.)

Government subsidies for ethanol production and legislative requirements that a particular percentage of one's energy portfolio be made up of ethanol are examples of taxing the poor and the unborn – almost literally taxing the food off their tables – to subsidize the entertainment of the aristocracy. The legislation demands that a certain amount of food production go to ethanol, which makes it unavailable to those who are starting, and is a substantial contributor to rising food costs around the world.

Not only is it morally wrong to tax the food from the poor to pay for the entertainment of the wealthy, it is also immoral to do nothing about it in a democratic political system where one has the power to act.

Yet, the claim that 'the price of gasoline' is America's number one concern suggests that Americans are not morally concerned with taxing the poor and the unborn to entertain the wealthy. In fact, their number one concern is that the government must inflict even higher taxes on the poor to entertain the wealthy. It suggests that they want to see more food taken off of the tables of the poor around the world and converted into energy for the rich, and they want to lower the price of gas so that we can continue our high rates of fossil fuel consumption that taxes future generations with the cost of global warming.

Actually, what we need is to eliminate the subsidies for ethanol – eliminate all subsidies for the production and consumption of fossil fuels, and impose a tax where those who use fossil fuels will pay the costs of their own consumption, rather than pass those costs onto the poor and the unborn. This will then promote the development of energy resources that do not tax the poor and the unborn for the entertainment of the rich.

In fact, we might even provide the poor and the unborn with a significant benefit. The worldwide development of energy resources that do not tax the poor and the unborn mwy not only liberate them from these taxes. Economies of scale and technological advances might even provide them with cheep energy that they can use to improve the quality of their lives without doing harm to others.

Even the rich might benefit. Replacing a source of energy that taxes the poor and the unborn will, over time, leave the poor and the unborn better off, which can generate positive benefits throughout the economy. Those benefits will ripple through an economy that has been made not only more prosperous, but more just at the same time.

But it starts with those who consume gasoline insisting that they will not demand the taxation of the poor and the unborn for their own benefit. It starts with their willingness to pay the full cost for the gasoline they use, rather than hand the bill to others- an act as unjust and immoral as taking money out of their wallets and using it as one’s own.


Anonymous said...

Lets also remember that peak oil is real and worldwide production of oil is going down. Thus we have more people chasing fewer barrels of oil and thus we see $120 oil.. I foresee the day where $200 oil is the norm and then will really here people bitch as they charge another tank full of gasoline to waste.. American's are the most wasteful being on this planet..

Tommykey said...

Hey Anonymous, are you by chance the same one who commented on my blog Exercise in Futility a couple of weeks ago?

Anyway, I agree that gas taxes should not be repealed, as lower prices will encourage more driving which will just drive up the price even more. Furthermore, purchasers of vehicles whose MPG falls below a certain level should have to pay a tax. That might encourage some consumers to purchase more fuel efficient vehicles.

I support not adding any more to our Strategic Petroleum Reserve. From what I have read, we currently have 700 million barrels in the SPR, and the Bush administration is looking to raise it to 1.5 billion barrels. In other words, the American consumer has to compete with its own government for a limited supply of oil. I would even be in favor of drawing down the SPR to reduce oil imports a little bit.

I have taken steps to reduce my gasoline consumption and it looks like I will be able to go three weeks from when I last filled my tank up before I have to fill it again.

mikespeir said...

"Furthermore, purchasers of vehicles whose MPG falls below a certain level should have to pay a tax. That might encourage some consumers to purchase more fuel efficient vehicles."

My work depends upon my 18-year-old clunker. It's all I can do to scrape by from one month to the next. And you would impose an additional tax on me? I sure can't afford a new car!

Tommykey said...

Mike, I said purchasers of new vehicles, not a retroactive tax on current owners!

mikespeir said...

Okay, you didn't say "purchasers of new vehicles." (I bought mine used. It was all I could afford.) But this makes your idea a bit more palatable.

Alonzo Fyfe said...


My position . . . given the premises that I put into the posting about the effects on differences in wealth . . . would be to tax the rich to subsidize the poor to the degree that the poor depend on consuming fossil fuels. This would include a subsidy for heating costs and vehicles for business reasons.

Tommykey said...

Sorry I wasn't clear on that Mike. I meant that it should apply to purchases of new vehicles, but I didn't word it properly to convey my meaning.

Anonymous said...

NO I'm not the "Anonymous" poster to your Exercise in Futility blog.. I am a firm believer in peak oil after studying it for the past 3 years.. I've learn more about the oil industry than I ever thought I would and its fasinating.. Are you familiar with the Land export model by Jeffery Brown??