Wednesday, August 27, 2008

Gas Prices, Tipping Points, and Demand Destruction


The Valero station above is where I usually fill up, since most of the time it has the lowest prices in the area. Gas prices peaked here a couple of months ago at $3.939, so to see them drop to $3.399 this week was a relief. Last year, when gas prices peaked here at around $3.159, I remember how high that seemed at the time, and that I tried to drive less. Now, after paying $3.939 per gallon two months ago, paying $3.399 seems like a deal. I don't think about gas prices much now when I decide whether or not to drive somewhere.

Thinking about this, I recalled recent columns claiming that $4 per gallon gas was the tipping point into demand destruction, so the corresponding oil price (~$149 per barrel) was the peak (some columnists went further, and claimed that oil was on its way back to $70 or less per barrel). A problem with the tipping point concept, as my reaction above demonstrates, is that the mind adjusts, so tipping points are a moving target. $4 gas may have been the tipping point that caused Americans to drive less this year, but next year that tipping point might be $4.30, and the next year $4.50, and so on.

That's just us, of course. The rest of the world has plenty of drivers, and many of them in developing and oil-producing countries have gasoline subsidies that insulate them from the effects of higher oil prices.

9 comments:

Alexg said...

errrr peaked at $3.93? Here in Los Angeles we paid as much as $4.85 at Chevron. That's wheny ou really start feeling it =)

Bill said...

When a European like me reads yet another American blog complaining about gas prices reaching $4 -- all we usually do is shake our heads and smile.

Europe certainly doesn't thrive off subsidized gas or oil. In England where I'm from gas prices reached between £1.10 -- £1.20 a litre. That equates to £4.16 for a US gallon, which converts to about $7.32 for one US gallon.

I can't get away from the belief that the US govt. somehow has always subsidized US gas prices. American gas prices -- in terms of the major world economies are the cheapest around as far as I can see. Count yourselves lucky.

What else can I think ?

DaveinHackensack said...

Alex,

California's always had about the highest gas prices in the country. Fortunately, the times I've driven in California were on business, so I didn't have to pay out of pocket for gas there.

Bill,

The U.S. government doesn't subsidize oil prices, it just doesn't tax them as much as European countries do. Federal gas taxes here are a flat 35 cents per gallon. Gas prices in the U.S. are probably closer to the market price than in any other country.

J K said...

Ha, I fill up at Valero as well. They are the cheapest for miles.


Bill - Europe is also much less spread out and has higher quality public transportation than the US, meaning we have to drive a lot more. Not to mention there are many, many american communities in the American heartland where the highest wages to be found are only 12 bucks an hour with no major corporations except maybe Walmart to provide jobs....So before you smile at us silly sheltered americans complaining about gas prices remember that comparing the US prices to Europe is not an apples to apples comparison. :)

doofus said...

You don't need an outright subsidy on gasoline to subsidize driving. After all, most infrastructure spending in the US on bridges, highways, airports, etc. comes out of general funds. That is a de facto subsidy. To expect people to react to market forces, they need to be paying real market prices.

Anonymous said...

"After all, most infrastructure spending in the US on bridges, highways, airports, etc. comes out of general funds."

Do you evidence to back up that claim? What percentage of highway spending is covered by the gas taxes? What percentage of other infrastructure spending is financed at the state and local level by municipal bonds?

DaveinHackensack said...

Incidentally, the price is down another two cents at that Valero today.

doofus said...

Good question. I don't. At least, not offhand. But doing a bit of research, I can find something to support just about any point of view. That said, this report was just about the most comprehensive analysis I found. It concludes (see page 77) that gas taxes are short- between 20 and 70 cents per gallon. Given that state and local taxes are lower than this range (28.9 in NJ, 46.4 in WA), I feel pretty comfortable in my earlier assertion.

The USDOT figures it a bit differently, and appears to report a net overpayment of highway funds, though I couldn't find any gross figures that were not normalized by travel miles.

I'll leave the bond question to you. :)

slowsmile said...

Dave,

You're quite right in what you say about the tax. But maybe you should have said taxes. Read this explanation:

From: http://money.uk.msn.com/investing/articles/john-stepek/article.aspx?cp-documentid=7420557

"According to PetrolPrices.com, if petrol was 90p a litre (oh, those were the days) then 47.1p would go on fuel duty, plus another 13.4p on VAT. Another 23.2p pays for the petrol itself, and 6.3p goes to the retailer."

Just to clarify(and this breakdown shows prices which occurred before oil went up):

Total Cost per litre:
90p = $1.80

Which comprises of:
13.4p = 26.8 cents Vat tax
47.1p = 94 cents govt. tax
23.2 = 46.4 cents cost
6.3p = 12.6 cents profit

So the total English tax on one litre -- one litre remember, not gallon -- of petrol is about 68% of the actual price. Same same for Europe. But you guys pay 35 cents
a GALLON in tax for your gas.

To j k

Afraid I don't agree with your view on the affordability and cost of your gas in the US.

How can you believe that your transport costs are more expensive and less affordable than ours -- when your gas and diesel are way, way cheaper than in Europe? I've just proved it. That must make your gas transportation very cheap, mustn't it? And wages in Europe aren't that much higher than America's -- especially when you compare the cost of living between Europe and America(America is still much cheaper).