Monday, August 19, 2013

Gas prices are strange things

A summary of findings on a quick search for the features of the gasoline industry.

Gas taxes is a very strange economic animal. Gasoline is necessary for people to get around, and taxing it provides revenue for the government. This makes it an incredibly unusual sector in the economy given how no other item fuels transportation to the same level. I first thought that the association between gas taxes and the price of gas was misleading between countries (because I found little correlation between gas prices and gas taxes different states in the USA) and given the economic integration between European nations and that they will get their oil from similar sources (Russia, Norway, Middle East, and North Sea) I expected them to be similar, but in fact that is not the case as the gas prices range from $1.68 per liter in tax-free Samaun, Switzerland to $2.56 per liter in oil rich Norway. The US pays about $1.00 per liter currently tax included. Gasoline is a very complicated economic issue.

I was looking at gas prices per country and when you take in the cost of taxes and how much goes to the oil company I think of a potential reason why gas prices change by country. One statistic I found is the average price before taxes is actually lower than in Germany. This is interesting given the incredible amount of oil they receive from Russia. But when you take the ordinary view to taxes, you find that the high tax burden reduces the amount of money going to the gas company, meaning more of it goes towards the government. Without taxes, the price of gas in Samaun, Switzerland is still $1.68 per liter, none of which goes to the Big Bad Government. It means the profit goes to the owner of the store, not to public works. Reducing the gas tax doesn't necessarily mean that the cost of gas will decrease!

I suspect given the differences between countries and total amount spent on gasoline changes the elasticity of gas prices between countries, because in a country with mass transit options there will be less traffic (due to fewer cars) and less time needed to get to work or home, which decreases stress and increases work energy, which could be a factor to why Europeans make more than Americans in general (measured by Median Income).

The costs of expensive vs. cheap gasoline aren't just limited to the price at the pump but also how expensive it is to park in different countries and cities. It also changes by the amount of time you spend in traffic. If you spend most of your time in traffic you have an economic opportunity cost to having low gas prices (as exists in the United States) which means your real savings are going to be lower than they already appear. German cities don't have traffic like in the United States since they have mass transit that is efficient. This saves a lot of time, and when you factor in the cost of parking in the United States the cost of driving here is closer to that of Europe. We also spend far more of our income on driving than most Europeans. (Bloomberg)

Also, if the United States paid $1.50 per liter most of us would have no alternative most of the time to driving which would be a much bigger blow to our economy than rising Europe's price per liter by 50 cents would be. This is probably part of why the percent of income spent on gasoline is higher in the United States than all of Western Europe. Given how local mass transit is really inexpensive in Europe it costs less to get around than in the United States. The effect of the change of price on gasoline on the economy is much more volatile in the United States than Europe due to existing lack of alternatives to driving for the majority of Americans.

As a sidenote, one finds that the cost per mile of flying in Europe is lower than that in the United States with a higher price of oil. This probably has to do with the competition between airlines and the competition between airlines and railways, both of which reduce the price as Adam Smith would predict.

In summary:
  1. Reducing the gas tax does not mean the price at the pump will remain lower in the long-run. Gasoline is not a perfectly competitive good, so it will not have a balanced reaction to price changes.
  2. Countries that have higher taxes gasoline pay less money to oil companies than countries with lower gas taxes and have more money for public works like mass transit that leads to savings in parking, pollution, and time in traffic. This further reduces the overall cost to society.
  3. Other costs to individuals and society come with with less expensive gasoline in traffic jams, parking costs, and environmental damage, which makes the savings less.
Interesting reading that led to my conclusion: which is very well sourced.

Now, what would I do differently?
First of all, gasoline is a naturally ologopolistic good. You will never have a perfectly competitive gasoline marketplace, and this means the price will always be higher than potentially competitive alternatives, such as hydrogen if we can import the technology to develop it on site as Scandinavia is working on and Iceland has done. ( This requires strong bold action to change the energy paradigm of an entire nation, so it will need to start soon as Governor Schwarzenneger (R, amazingly) did in California. By having hydrogen it will be more competitive and it will depress the price of hydrogen across the world. If we can develop fuel cells and/or solar panels for flying than flying will remain an option for the future. Some people then think of blimps, but there are modern ways of storing hydrogen under high pressure that is safe, and offers 500 to 600 km (310-375 miles) on a single tank with quick fueling, which is competitive with gasoline filled cars. This requires intelligent thinking on the part of governments and the development of companies to move our energy paradigm since the end of oil is inevitable.

Electric cars are talked about, but their lack of range and the unlikelihood of developing batteries that can both charge quickly and go for long enough distances, makes electric cars an uneconomical and impractical solution.


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