The real cost of gasoline
I appreciated Matt Rojansky’s post the other day that expressed skepticism about presidential candidates (and others) who rely primarily on technological solutions to our oil dependency. This technological solution to this public policy issue is certainly one component of the solution. However, without getting the economics right, I fear that new technology will only inch us along to the ultimate solution.
What we need are bold bipartisan solutions. Instead what we get are feeble proposals that ask no one to sacrifice. Everyone agrees that the energy challenges we face are immense and that the infrastructure and lifestyle that we have to today that has been built up over decades can not be maintained. Few politicians – Democrats and Republicans – have the political courage to actually propose solutions that are commensurate with the challenges we are facing both in terms of energy supply and environmental degradation.
Robert Samuelson had a very useful op-ed today in the Washington Post on this issue that is worth a look.
Technological solutions are great and they certainly will be part of the solution. However, if the market is construed in a way that doesn’t promote usage of those new technologies, then they just sit on the shelf or are used primarily by enthusiasts and environmentalists. While it’s great for us to buy hybrids because we feel that they will benefit the environment, the plain truth is that if we simply rely on peoples’ goodwill and environmental awareness to decrease our consumption and increase conservation, we’ll barely make a dent in the enormous problem that we are facing.
What I’m talking about are real economic incentives and disincentives. Let’s just take the cost of gasoline. We all know that gasoline in the US is absurdly low, even with the recent price increases. The cost doesn’t reflect the externalities that are part of the production and usage of gasoline. According to one analysis, just adding in the national security costs of maintaining access to oil in the Middle East raises the cost of a gallon gas to $5.28. If we take into account the environmental damage that burning gasoline causes, the price would be significantly more. So, let’s say that the real cost of gasoline, when taking into account all the externalities is $8/gallon. At $8 a gallon, all of these other technological solutions that were previously considered unrealistic, all of a sudden, look like pretty good deals. This also creates a huge incentive for companies to create new technologies that could help undercut this high cost of gasoline. My point is that high prices of gasoline are probably one of the best ways to ensure the adoption of the new technologies that everyone is hoping will solve our oil dependency and environmental problems.
Of course, most people will say that proposing a gasoline tax is political suicide. Please read my previous blog post that suggests a gas tax refund that proposes that at the same time we dramatically increase the gasoline tax, we make an equal cut in a current regressive tax – the payroll tax. This tradeoff would mean that the average person would be left with the same money in his/her pocket at the end of the day, but would have a very strong incentive to switch to new fuel saving technologies. Granted, some people will be better off and others will be worse off, but let’s not fool ourselves into thinking that the dramatic changes necessitated by the energy problems we’re facing will be solved for free through the magic of technology.
It’s time that members of both parties recognize the magnitude of the problems and admit to the American people that solving these problems will be costly and we’re all going to have to bear this cost. Not a very popular political line, but I would argue that this is the type of bipartisan political leadership that this issue demands.
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