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
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
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
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.
policies add to the cost of gasoline. President Clinton’s veto in 1996 of a
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.