Boycotts, Price Caps and Rebates

As the hysteria about US gasoline prices continues, I keep asking myself how I'd view this if I hadn't spent most of my adult life in the energy industry--or lived in Europe, where prices have been higher for decades. Would I be calling for investigations of oil companies, or asking my Congressman to impose windfall profits taxes or reduce (or increase) gasoline taxes? I'll never know. Instead, I can only regard some of the recent developments as a theater of the absurd, exemplified by a CNN interview last Friday with a Brooklyn gas station owner. As he railed about the lack of a coherent national energy policy and the inadequacy of oil company investments in alternative energy, the camera focused on his gas pumps, which displayed a posted price for regular unleaded of $4.149/gallon. That's about $1.35 over what his supplier is charging him, after all federal, state and local taxes.

We've also seen municipalities in Texas and on Long Island organize boycotts of major oil company branded stations. The degree to which this hurts local businesses, rather than multinational corporations, seems to be more of an inconvenient detail than an actual deterrent against these empty gestures. In one positive development, Hawaii has rescinded its widely-publicized gasoline price cap , after discovering that it actually raised the fuel price paid by Hawaiians. The question that's rarely asked, however, is whether we are paying too much attention to the price of this commodity, which according to the government's Bureau of Labor Statistics accounts for less than 5% of the expenditures of the average household?

The average car in America drives about 12,000 miles per year and averages roughly 25 miles per gallon. That equates to 480 gallons of gas, or about 40 fill-ups. The average pump price for unleaded regular last year was $2.27/gal., compared to $2.92 last week. That means our average driver is paying about $300 more per year to tank up, equivalent to 0.7% more of median household income, or about the price of an iPod. Double that if there are two cars in the family. But no one is average. For everyone like me, using only 278 gallons last year, there's someone else driving an SUV 20,000 miles per year and getting 14 mpg. If they make $35k, they are going to be hit much harder: $925 worth, or an extra 2.6% of earnings--perhaps the entire after tax benefit of their last raise.

So while for many Americans high gas prices are really just an annoyance or inconvenience, as a New York Times business section op-ed suggests, for others it's either a genuine hardship or a brutal reminder that they ought to have paid much more attention to fuel economy the last time they bought a vehicle. Either perspective makes the public reaction to the proposed $100 gasoline rebate equally perplexing.

As shown above, the financial impact of higher gasoline prices for the vast majority of American is in the hundreds, rather than thousands of dollars per year. Practically every proposal I've seen for higher gasoline taxes, whether to curb consumption or to reduce greenhouse gas emissions, has included a provision for recycling at least part of the tax revenue as rebates to lower-income consumers. Although the abortive $100 rebate was unfunded, that was not the chief argument against it. Critics found it insufficient and insulting. Yet, compared to the alternative of rolling back gasoline taxes at the pump, the rebate was a much sounder piece of economic policy that wouldn't distort the supply-and-demand-balancing function of market prices.

Having thus demonstrated government's impotence to provide short-term relief, large numbers of us are still fulminating about something over which only consumers have any real influence. Blame whomever you like, but recognize that government cannot lower prices without impeding supply and demand. Oil companies can't create supply out of thin air, unless the projects to do so are already in the pipeline. Nor will taxing them harder create a single extra barrel of supply, though it may just dry up some we'd get otherwise. Instead, the action our state and local leaders ought to be calling for is not boycotts of Exxon stations, but rather carpooling, reduced highway driving speeds, and errand consolidation. Perhaps we need something like the old Smokey the Bear ads: only you can reduce gasoline prices.