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08/01/2007 - 9:40pm

Gas Prices Are Artificially Low


I have a theory about gas prices. People are often complaining about how expensive gas is, especially here in Phoenix. Not because our prices are high; they're actually lower than the national average at the moment; but rather because Phoenix is built in such a spread-out way that going anywhere is often a long drive.

But my theory is this; gas prices are artificially low, and here's why. When the demand for something increases, prices go up. Similarly, when the supply of something goes down, the price also increases. Gas, and energy in general, has experienced both an increase in demand and a decrease in supply. While the prices have gone up beyond many people's comfort level, it has not gone up as much as it should have over the past few decades.

The US federal government has been giving huge subsidies and tax breaks to oil companies, allowing them to keep their prices low. This can be seen when comparing the price of gas in the US versus other countries, such as those in Europe. Initially, this might seem like a good idea, even though it means that we're ultimately paying more for energy. But instead of paying for all of it at the pump, we're paying some at the pump and some in taxes. But since much of the cost of gas is hidden, people don't take the hidden costs into account when making their gas usage and purchasing decisions. In this way, government is also contributing to global warming.

If gas prices were not lowered by corporate welfare, we might be seeing prices at $7/gallon right now. At first thought, this would be awful. But this is where the free market comes in. There are all sorts of potential alternative energy sources for fuel, but with gas at $3/gallon, it's not cost-effective to develop these sources. So instead, we continue using gas at artificially low prices until we run out, and then we have no energy source because it was never developed.

So I'll spell out the two possible scenarios. First, we have what's going on right now. Gas prices are not rising as quickly as they should, so people will not curb their usage significantly. When the world's supply of oil approaches empty, prices will shoot up significantly just before we run out. At this point, we'll be in rush-mode to develop something new, but that will be difficult to do with little or no energy.

The second scenario is the way it should be. Gas prices should have risen slightly more quickly over the past couple of decades, which would make it cost-effective for alternative energy sources to be developed. I'm convinced that if this had happened, we would today have much higher utilization of non-fossil-fuel based energy sources more reasonably-priced than we currently do.

Politicians are often short-sighted, doing whatever they can to lower gas prices and pander to voters, while creating an inevitable energy crisis in the years to come.

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Posted by: nobody
08/03/2007 1:53am

Hi Nick,
Sorry, been busy, and haven't had a chance to read or reply lately, although I find your blog more stimulating and interesting than almost all others.

I had the same sort of hunch at one time, that the US goverenment was "in a way" subsidizing the American people (or the American economy) by keeping gas prices cheap. Gas prices are considerably cheaper for consumers in the US than in Europe, but much higher than in the middle east or any other strong oil producing nation. However, taxes are what make petrol-based fuel so expensive in the EU, so the fact that we don't have a similar tax-scheme on those fuels isn't really a subsidy in any way, shape or form, it's just a lack of taxation. As you should know, most of what you pay at the pump is tax, and the same is true in the EU, although the taxes are far more extreme.

Considering that, I don't think the "low fuel costs" in the USA are contributing to a negligence to seek cheaper forms of energy. After all, the US population is only 1/20th of the world population, so even if Americans aren't seeking cheaper forms of fuel, the rest of the world (i.e., 95% of the world) probably is.

Anyway, in my mind, fuel is extremely overpriced (and Over-taxed). In several states, food is not taxed, because it is considered a necessity, whereas fuel is heavily taxed, like a luxury, although in our culture, it too is (considered by most people to be) a necessity.

Also, as fuel costs (i.e., gas prices in the US) have increased, declines in fuel (gas) sales have been noticeable, which leads me to believe that gasoline is following the laws of supply and demand, and that is the primary reason, IMO, that they have not risen more.

Posted by: Dave Henning
08/05/2007 1:35pm

Actually, the question isn't only one of gas usage, but the entire car-driving subsidy. A study quote in "Suburban Nation" (written about 10 years ago) said that to cover all of the costs of driving (medical, law enforcement, road building, etc.) you would need a $10/gallon gas tax. This is something rarely brought up in mass transit comparisons.

What is also not included is the cost of all of Middle East meddling that it requires to protect this oil.

If we are truly going to have the benefits of the free market to encourage people to drive less, we need to associate the costs of driving with driving itself. Driving has many more negatives than just gas usage/climate concerns -- accidents, pollution, pedestrian unfriendly cities, just to name a few.

Posted by: Tom
08/07/2007 4:57am

Hi Nick,
I think many of your thoughts on the gas prices could be true but I also think gas prices are being held down low because this economy is at the breaking point. People are business are running out of money. It could truely cause an up roar if we had $5 or $6 a gallon gas prices.

Posted by: Nick Coons
08/07/2007 7:32am


I completely agree that an instant rise in gas prices to $6/gallon would be outrageous. What I don't see as a problem, however, is if the gas prices has risen up slowly and naturally to $6/gallon today over the past 30 years.

Posted by: Nick Coons
08/07/2007 7:37am


<If we are truly going to have the benefits of the free market to encourage people to drive less, we need to associate the costs of driving with driving itself.>

I don't think the concern is about getting people to drive less, but in incentivizing the free market to create fuels alternative to oil or other fossil fuels. At roughly $3/gallon, there is no incentive for anyone to spend the resources on R&D to develop renewable energy.

My idea is that if gas prices had risen naturally, without artificially being held down by subsidies, then they would have become high enough probably 10 years ago for the proper incentives to set it, and we'd be seeing large numbers of vehicles on the road today that don't use fossil fuels.

Instead, gas prices will continue to be held down virtually until we run out (or hit world peak), at which point it's too late to "start" mass-producing vehicles that use alternative fuels.

If my theory is right (or has some basis in fact), it's another way that government is contributing to the problem, not the solution.

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