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Posts Tagged ‘gas prices’

A 12-Step Program for Fuel Subsidy-aholics

Back when blog posts were composed with reed styluses on clay tablets, I put up a couple of posts (here and here) on fuel subsidies in the developing world. These are generally 1) fiscally ruinous; 2) terrible for the environment and traffic congestion;  3) highly regressive with regard to wealth distribution; and 4) market-distorting by artificially promoting fuel-guzzling industries. So I made the case that this is a pretty foolish public policy, in fact one of the worst I can think of. It’s up there with tobacco subsidies, the Concorde, pretty much everything the North Korean government has ever done, and our government’s failure in spending a paltry $615,000 taxpayer dollars for UC Santa Cruz students to digitize priceless Grateful Dead photographs, t-shirts and concert tickets.

Given the problems with fuel subsidies, I promised a third post on what to do to eliminate them. But since I have a day job, and being a professor is much more difficult than it looked when I was undergrad, I’ve procrastinated on putting this last post up. However, engineering student Kishore from India wrote asking where part three is, and customer satisfaction is a goal here at Freakonomics. Besides, no doubt governments around the world have been waiting impatiently for my post before they start dismantling their fuel subsidies, so here it is.

Given the damning case against fuel subsidies, and a rising swell of opinion that they are counterproductive on many levels, why don’t these policies go away? The IMF (see this) and I offer several reasons:

The Downside of More Miles Per Gallon (Ep. 115)

Our latest Freakonomics Radio on Marketplace podcast is called “The Downside of More Miles Per Gallon.” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.)

The gist: the Federal gas tax is a primary source of infrastructure funding but, politically, it has proven a hard tax to increase. Furthermore, because the tax is a fixed amount (18.4 cents per gallon) rather than a percentage, gas-tax revenues don’t rise even when gas prices do — as has been happening lately.

Even worse, as modern cars travel further on a gallon of gas (good news, right?), they contribute even less money for the roads they travel. And cars are going to get even more fuel-efficient.

So what’s to be done? Some politicians want to get rid of gas taxes in favor of an increased sales tax — which, Eric Morris argues, is a bad idea, since it shifts the burden to non-drivers.

Could Gas Cost More Than Your Car?

A major story on the NBC Today Show was about the sharp rise in the price of gasoline.  One “expert” claimed that, unless you have a very fuel-efficient vehicle, over a car’s lifetime gasoline will cost you more than the purchase price.  Really?  Say a new car costs $20,000, and is driven for 10 years, 12,000 miles/year.  If gasoline is $4/gallon, and the car gets a paltry 24 miles/gallon, today’s average for new cars, gasoline costs $20,000. So, even without discounting. the “expert” is wrong. 

Even if gas were $5/gallon, unless one discounts the future at a rate below 1 percent, the present value of the gasoline purchased is less than the price of the car.  I doubt that there are many new vehicles for which the expert statement is true, even if gas prices rise permanently far above the current price.  I do wish so-called “experts” knew the basics of Econ 1.

FREAK-Shots: Tequilanomics, and Fenway Gas

From a reader in Annandale, Va., named Christopher Galen, who earlier sent in his daughter’s third-grade economics quiz (never too young to start!), comes this pricing quirk:

That’s right: the cost per unit is cheaper on the smaller version, which isn’t the kind of pricing we’re accustomed to in this supersize-me era. (For an interesting related read, see “Does Food Marketing Need to Make Us Fat?” and a Forbes summary of same.) As Christopher writes:

I’m passing along a photo I took Friday at one of the state-run ABC liquor stores in Fairfax, Va. … Neither [bottle] was on sale, and it contrasts with most other liquor offerings, where larger product offerings tend to have a lower unit cost.

Which led me to wonder — and no, I had not done any in-store sampling — is this simply the counterintuitive marketing strategy of a state-run enterprise? Is the store trying to discourage excessive alcohol consumption by making smaller product sizes less expensive?

Why Don’t People Run Out Of Gas Anymore?

Blog reader Becky Roser sent an interesting email recently:

My father pointed out something interesting the other day – almost no one runs out of gas anymore. When gas was $0.60 a gallon, he maintains it happened all the time. Now that it’s $4.00, you almost never see it. I have vague memories of my father running out of gas when I was very young, but I’ve never done it. What changed?

A Different Kind of Price War: D.C.'s Watergate Gas Station

There’s a gas station near the Watergate Hotel in Washington, D.C. that famously sells very expensive gas. Reporters flock there for the standard sky-high gas price story, and residents have long suspected that the station doesn’t actually want to sell gas

According to a Washington Post article, those residents have the right idea. Apparently, the pricing puzzle at this gas station boils down to a dispute between two gas moguls trying to oust each other.

How High Gas Prices Triggered the Housing Crisis

Republican presidential candidate Rick Santorum made headlines last week when he suggested that high gas prices made mortgages unaffordable, causing the recent housing bubble to burst and sending the economy into recession. It may sound far-fetched, but it is precisely the theory that I and a pair of coauthors presented in a working paper released five days before Santorum’s remarks.

We are actually a bit more nuanced, arguing that unexpectedly high gas prices triggered the collapse of the housing market — igniting a fire fueled by easy credit, lax lending practices, and speculation. It is a provocative claim and one with broad implications, but it is also a claim supported by economic theory and empirical evidence.

The federal government’s Financial Crisis Inquiry Commission asserted in its 2010 report that “it was the collapse of the housing bubble . . .that was the spark that ignited a string of events that led to a full-blown crisis in the fall of 2008.” And a broad, if not unanimous, consensus among economists suggests that the ongoing economic malaise was induced by a financial crisis caused by the housing crisis. Relatively less well-understood is what caused the housing crisis in the first place.

Raising MPG Standards: The Second-best Solution to a Gas Tax Increase

It got surprisingly little press coverage given the degree to which it will affect our lives (thanks, pesky world economic meltdown), but in case you missed it, the Obama administration recently worked out a compromise with the major automakers that will dramatically raise the corporate average fuel economy (CAFE) standards.
The new regulations mandate that the mix of new cars sold in the year 2025 must achieve about 54.5 miles per gallon (though if you read the fine print you’ll see that credits for various other green innovations mean that actual fuel economy will be more like 40 MPG.) For reference, the auto fleet currently on the road gets about 27 MPG. It’s a well-done agreement that will help avoid well-done citizens as global warming accelerates.
Before proceeding, let me note that I am strongly in favor of this policy. The problem of excessive fossil fuel use in transportation is multidimensional: if the issue of global warming doesn’t move you, the thought of Hugo Chavez and Mahmoud Ahmadinejad using our own hard-earned dollars to tweak our geopolitical noses should.
However, it is worth noting that raising CAFE standards is what political scientists and economists call a “second-best” solution; we could be doing considerably better if we thought all of this through more clearly.

FREAK-est Links

MIT turns 150, women prefer sad men to happy ones, an interactive map of wages in cities across the U.S., and more.

A Crude Guess About The Future

Though it has an upside for the biosphere that shouldn’t be ignored, $100/barrel oil definitely isn’t much fun for our pocketbooks or the world economy. And could worse times be ahead?
When we see spikes like this, there are inevitably voices predicting stratospheric prices for crude just beyond the horizon. The basic reasoning is that oil supplies are finite (clearly, in the very big picture they are), and that world oil demand is set to skyrocket thanks in large part to the motorization of India and China (it is—see my last post.) “Peak oil” advocates maintain that at some point we are simply bound to run out of the stuff.
I’ve never been a big fan of the peak oil story. First, price signals will encourage conservation as oil gets more dear, reducing demand pressure. We’ve already come a long way on that front; in 1970, the average car on the road got about 14 mpg, and the average van, light truck or SUV about 10. Today, the averages for new cars and trucks sold are considerably more than double those figures, and things continue to move in the right direction thanks to government regulation (rising CAFE mpg standards), new technology (including but not limited to hybrids), and the fact that consumers respond to oil price increases pretty much like economists predict they should, changing purchasing, travel and location decisions in order to conserve when oil prices rise.

Fill Up the Tank in Luxembourg

The price of gasoline is currently outrageous in the Netherlands, about €1.60/liter (about $8.80 per U.S. gallon). What do residents do? They arbitrage, so that if they’re headed south they plan to drive through and fill up in Luxembourg, where the price is “only” about €1/liter. This is a bad idea, unless your trip would take you near there anyway. Also, because there are often long lines of liked-minded arbitrageurs waiting to fill up, this is a bad idea if your time is valuable.

A Mandate to Be Inefficient

This week, the United States Supreme Court delivered a decisive blow to Mayor Michael Bloomberg’s plan for New York City taxicabs to go green, to switch to hybrid cars. This all started a few years ago when Bloomberg announced a plan to mandate that the famous New York City taxi fleet go all-hybrid. The classic Crown Victoria gets about 12 miles per gallon, whereas a hybrid taxi gets 30 miles per gallon. Quite a difference! So this is great for the environment.

How to Kill Small-Car Sales

U.S. auto sales are looking a bit better this year. Trucks in particular are doing well. But one category is moving in the opposite direction. Why? Some blame has to go to the fall in gas prices from a peak of more than $4 a gallon. That’s right: it’s the tiny, gas-stingy cars that aren’t moving off the lot.

Watt's Next: Your Thoughts

With a large number of electric vehicles in the pipeline (see this new piece in The Economist), my staff EV expert (my brother Brad) and I asked for your wit and wisdom on their prospects. Some of your thoughts on whether EV’s will “clean up”:

It Won't Be So Bad: A Q&A With the Author of $20 Per Gallon

It’s notoriously hard to predict gas prices. Who would have thought in 2006 that we’d be paying $4 a gallon in 2008? Or, as prices peaked last year, that we’d be filling up for $2.50 a gallon this summer?
That said, civil engineer and Forbes reporter Chris Steiner argues that prices will rise precipitously over the next few decades. (It would probably make as much sense to argue that electric cars will take over and gas prices will fall, but that’s another argument for another day.)

Turning the Corner on Driving?

Nate Silver, a Freakonomics favorite, wonders if the American car culture is finally coming to an end. Silver points out that Americans drove much less this January than last January, even less than expected in a bad economy with high unemployment. Part of the decrease may be explained by a delayed response to last summer’s high gas prices, but Silver . . .

Want A Politically Viable Gas Tax? Make It Voluntary

Like Greg Mankiw, I think it’s a no-brainer that we should raise the gas tax. But it’s incredibly difficult to muster the political will to impose a traditional tax. (Witness California’s inability to increase the state gas tax by a measly 12 cents.) Last year, Robert Samuelson (and a host of others) proposed a contingent tax that only kicks in . . .

Security Blanket — With Sleeves!

The marketing hook for the suddenly-everywhere Snuggie is that its form-fitting coziness helps you keep down your home-heating bills. (O.K., that’s only one hook: the ads also claim that ordinary blankets are too cumbersome and may, tragically, entrap your hands.)

I'm Sorry, But We're All Paying Less for Gas

A story in our local paper talks about the problems of West Texas. This area, the center of the Texas oil industry, is suffering. People are being laid off from the oil fields, because drilling has, as it were, dried up. No surprise: With the price of oil below $40, and with drilling a supply response to shocks that raise . . .

The Gas Tax Revisited: A Guest Post

It would seem to be a fantastic time to raise gas taxes right now: while the economic climate is so dire that all other tax hikes have been shelved (even the high-earner income-tax increase that Obama pushed during his campaign), gas prices have fallen so far in recent weeks that even an outrageously high per-gallon tax wouldn’t hurt much right now. (It’d be kind of like a SMarT Plan in reverse.) But as with all tax matters, things aren’t so simple.

Pray at the Pump

The L.A. Times reports on a group claiming that the recent reduction in gas prices was caused by prayer. “If the whole country keeps on praying, we can bring down prices even more — to even less than $2,” says Rocky Twyman, founder of Pray at the Pump. If prayer did cause the price to drop, did it do so . . .

Reports of Sail Freight’s Demise Have Been Mildly Exaggerated

Photo taken from Kathleen and May Levitt recently sang the praises of cheap wine. But how can wine stay cheap when oil prices keep pushing up the cost of transportation? Sailing ships might be the answer. Last Friday, a 108-year-old British sailing ship delivered 30,000 bottles of French wine to Dublin. It was the first time since the 1800’s that . . .

What Exactly Concerns Us About Gas Prices?

There’s no doubt that Americans are currently frustrated by high gas prices. And certainly many voters believe that “something oughta be done about it.” But why? Here’s a simple taxonomy of concerns: 1. Relative prices: Are people frustrated that a gallon of gas now requires more foregone “stuff.” Or alternatively phrased, are they concerned about the low relative price of . . .


Continuing his push for a gas-tax holiday, Sen. John McCain told a town-hall session last week that he “trust[s] the people and not the so-called economists to give the American people a little relief.” So who do “the people” trust to give them economic relief? By a margin of 50 percent to 44 percent, it’s Sen. Barack Obama, according to . . .

Our Daily Bleg: Who Are the Gas Siphoners?

A reader from Boston named Robert Veneman-Hughes writes in with a bleg request on a subject we’ve wondered about before here: gas siphoning. Here’s what I wrote not long ago at the end of a post about an increase in theft of catalytic converters: I haven’t read many articles lately about people who steal gas out of people’s tanks, even . . .

Stop Complaining and Blame Yourself

Here’s a good way for the government to reduce the heat it’s taking about high gas prices: giving every American a miles-per-gallon meter (worth about $200). The Web site Hypermiling claims that knowing your gas mileage is the best way to cut gas consumption. Using a meter and gas-saving driving techniques, self proclaimed “King of Hypermilers” Wayne Gerdes recently got . . .

If at First You Don’t Succeed

As the average price of gasoline nationwide topped $4 a gallon this week, Sen. John McCain said he would renew his call for a summer gas tax holiday. The idea was roundly panned by economists (including the ones on this blog) when McCain and Sen. Hillary Clinton first raised it in May. This time around, McCain says he won’t “pretend . . .

Mixed Messages on Auto Use

We wrote not long ago about the various negative externalities produced by driving — congestion, pollution, accident risk, etc. — and how pay-as-you-drive insurance might help impose the true cost of driving on each driver. Now a reader named Larry Holt, the director of research of the Birmingham (Alabama) Regional Chamber of Commerce, writes in with an interesting point about . . .

$2.99 Gas

I love Chrysler’s new incentive program that guarantees consumers who buy one of their new cars or trucks won’t pay more than $2.99 a gallon at the pump for the first three years they own the vehicle. When you sign up, you get a special credit card that can only be used to buy gas. When you swipe it, $2.99 . . .