In a recent survey conducted in California, three-quarters of all people agreed that higher "gasoline prices are the result of oil companies trying to boost profits rather than a legitimate market condition."
The answer, though, is more complex than that. Much of the $10 a barrel increase since the beginning of the year can be blamed on the so-called "fear premium" among oil buyers, as well as a rebounding world economy that demands more energy. Even so, government choices are making matters worse by adding to the price of fuel.
A LITTLE PERSPECTIVE
It is true that $2 a gallon can induce "sticker shock." But when compared with the population’s growing income, the high cost of gasoline is not as high as it may first appear. In 1981, during the Iran-Iraq war, for example, gasoline was $3 a gallon in today’s dollars. Since the OPEC oil embargo of 1973--remember that?--personal income has gone up twice as fast as the price of gasoline.
POLICY-DRIVEN PRICE HIKES
The role of taxes in keeping prices high cannot be neglected. Start with the federal tax of 18.4 cents per gallon. Add to that state taxes of various sorts. In Michigan, gasoline is taxed at 19 cents per gallon. Then there’s also a 6 percent sales tax, and an "environmental regulation fee" of 0.875 cents for underground storage tank cleanup. (Tax rates are available in this PDF document from the American Petroleum Institute.)
To help consumers adjust, the state could lower its taxes. But right now, state officials say they "can’t afford" to. It’s time for government to restructure itself, as private business continually has to, to lower its cost of doing business.
Simply putting highway maintenance projects up for competitive bid would be a good place to start. Based on various studies of competitive contracting already in place in various government infrastructure projects, the state could save over $58 million in road maintenance costs by putting projects up for competitive bidding.
Prevailing-wage laws, which dictate union wage scales for government projects, are another indirect factor propping up gasoline taxes. By requiring that taxpayers pay above-market wages for road construction, every penny spent by a motorist on highway projects shrinks by 15 percent.
Diversion of funds to non-road projects is another policy choice that adds to the tax burden. Public transit in the state accounts for less than 5 percent of all commuter traffic, roughly equal to the national average. Even though transit accounts for such a small amount of all commuting trips, it absorbs 20 percent of all federal funding on transportation.
Finally, environmental policies add to the cost of gasoline. President Clinton’s veto in 1996 of a measure to tap 5 to 16 billion barrels in the Alaskan National Wildlife Refuge (ANWR) reduced the available supply of oil. Presidents before and after Clinton have taken measures to put other potential oil fields out of reach.
David Littman, chief economist of Detroit-based Comerica Bank has addressed another environmental policy. Under "clean air" requirements, 17 "boutique fuels" are sold in the country, making it nearly impossible for distributors to shift supplies around as prices dictate. Littman called for an end to the fuel requirements, saying "the federal government should remove the regulatory restrictions to supply and immediately rescind the gasoline-reformulation requirements until further notice. It is the so-called boutique fuels that are absorbing all of the refining capacity in this country."
A LAW AGAINST DISCOUNTS?
As if all these policies had not caused enough damage, some gas station owners have called for a law to prohibit retailers from selling gasoline below their costs. So-called predatory pricing is nothing new; in the retail trade it’s called using a "loss leader." Sell a DVD player for $25 on the day after Thanksgiving, for example, and a mass-market retailer draws in people who will buy other goods.
Wal-Mart has been accused of using below-cost pricing of gasoline to draw shoppers to its stores, and refinery-owned gas stations can still find it worthwhile to sell discounted gas. Naturally, other retailers don’t like the competition, and have enlisted some legislators to the argument that consumers ought to pay higher prices.
The economy in the country and across the world is growing. That’s the good news. But that growth is increasing demand for fuel--and hence, fuel prices. Adjustments will come in time, but before calling for more laws, we ought to look at the ways that public policy adds fuel to the fire that’s burning in the public’s wallet.
John R. LaPlante is an adjunct scholar with the Mackinac Center for Public Policy and the Taxpayers League of Minnesota. His Mackinac Center work includes Why Energy Conservation Efforts Fail.