Gas prices are rising, but the truth is, they were too low to begin with.
Photo By Alex Millauer / Shutterstock Shutterstock License
Gas prices were already going up as Russia’s bloody war against Ukraine entered its third week. President Joe Biden—who had authorized a set of strict economic sanctions on Russia—then took a step that he had been reluctant to take, even as Russia escalated the violence against its much smaller neighbor. The United States administration announced a ban on imports of oil and other energy products from Russia.
A ban would hit Russia hard. Oil is the cornerstone of Russia’s economy. As of 2019, oil and gas accounted for 60 percent of all exports from Russia, and revenue from the industry made up 39 percent of the Russian federal budget. In his announcement, Biden did not disguise the fact that in the United States, gas prices would be going up as a result of the ban.
Russia’s war on Ukraine has already set off a new surge in oil prices, and the uncertainty in energy markets appears likely to get worse with the ban on Russian oil imports. In early February, several weeks before Russia launched its invasion, the national average price of regular gasoline was $3.44 per gallon, according to AAA. That was already a 24 percent increase from one year earlier.
After 12 days of the Russian invasion, the national average gas price spiked to $4.07 per gallon. In California, a gallon was going for a statewide average of $5.34, the highest in the country.
Biden was already taking political fire from Republicans over rising prices at the pump. Gas prices were going up for months as the country inched its way out of the economic slowdown caused by the COVID-19 pandemic. And those same Republicans—according to a Washington Post report—were at the same time pushing Biden to ban Russian oil imports, and preparing to attack him over the inevitable price hikes that would follow the ban.
Rising gas prices are a bad thing politically for Biden, or any president who happens to be in office as prices go up, and they are clearly bad for drivers. But in the long run, for the country and the world as a whole, are high gas prices really that bad?
The high price of gas might even be a good thing. Here’s why.
First, even with the seemingly dramatic rise in gas prices this year, Americans continue to enjoy relatively cheap gasoline compared to the rest of the world. According to data from GlobalPetrolPrices.com, which monitors gasoline prices in 150 countries, at the end of February 2022 most of Europe was already hit with gas prices topping the equivalent of five U.S dollars per gallon. The site’s data showed 16 European countries with prices in excess of $7 per gallon, and six of those stood over $8.
The country with the cheapest gas, per the data from GlobalPetrolPrices.com, is Russia, where drivers pay just $1.82 per gallon. Measured in real terms, however, Russians aren’t quite getting the great deal that price tag would suggest. In the United States, where the average driver consumes 594 gallons of gasoline per year, even at the $4.07 price tag, an statistically average American spends about 7 percent of annual household income (which in the U.S. is $33,740) on gas.
In Russia, where an average household brings in just $6,493, a driver would have to spend 17 percent of that income to drive the same amount as the hypothetical average American.
While there are a number of economic factors that drive gas prices up or down, one of the most important differences between countries is the tax charged on filling up a gas tank. Here, again, Americans get off easy. Taxes on gasoline in the United States have not been raised since 1993—and they are not linked to inflation or the rising price of gas.
Americans pay the same 18.4 cents per gallon in tax that they paid 29 years ago. That amount is now worth 45 percent less than it was back then. That’s 45 percent less money for road maintenance and construction, as well as other transportation infrastructure projects. According to the Peter G. Peterson Foundation, a nonpartisan economic think tank, if the gas tax had simply been pegged to rise along with inflation, it would be 15 cents higher today than in 1993. In 2021, the tax accounted for about 19 percent of the price of gasoline.
The United Kingdom, on the other hand, charges its drivers 63 percent in gas tax. Italy does one better, at 64 percent. Even the United States’ northern neighbor, Canada, charges a 32 percent gas tax.
Because the U.S. gas tax has remained artificially low, the Highway Trust Fund—which finances transportation infrastructure projects—will face a $207 billion shortfall by 2031, according to a PGP Foundation report. Taxes on gas need to go up, and need to be connected to overall inflation, simply to keep the country’s transportation system in working order.
Gas prices may seem high, but not only are they relatively low in the U.S., they are kept that way here and throughout the world by governments—including the U.S. government—that shower oil companies with free cash.
In 2020, oil companies worldwide received a staggering $5.9 trillion in public subsidies, according to a 2021 study by the International Monetary Fund, with $660 billion of that total, 11 percent, kicked in by the United States taxpayer. That means in 2020, oil companies raked in $11 million per minute in government money alone. The giveaways to oil companies equaled 6.8 percent of global Gross Domestic Product—a figure expected to rise to 7.4 percent by 2025.
What do the subsidies mean for the prices of gas and other fossil fuels? Put simply, they should be higher. According to the IMF, the subsidies compensate for “large and pervasive” underpricing that stems mostly from oil companies’ refusal to pay for the cost of environmental standards. A whopping 42 percent of the $5.9 trillion goes to cover the cost of air pollution, with another 29 percent toward the costs of global warming. Eight percent of the subsidies cover the costs of actual oil production—for which oil companies also undercharge.
If fossil fuels were priced “efficiently”—that is, if gas and fuel prices covered actual costs—global carbon dioxide emissions would be cut to 36 percent below baseline levels, according to the IMF, which would be “well below” the two-degree Celsius warming limit set by the Intergovernmental Panel on Climate Change.
Another benefit of higher gas prices is that people drive less as the price at the pump goes up, which means lower levels of pollution, less traffic, fewer accidents and generally less driving-related stress.
According to a study by Bloomberg City Lab, the effects are not immediate. As gas prices go up and down, the immediate impact on total driving miles is insignificant. But over time, the changes in driving patterns make a difference.
The study divided the two decades of gas price fluctuations since the year 2000 into four phases. From 2000 to 2005, Bloomberg found, U.S. gas prices were kept mostly under $2 per gallon. During that period, each individual American drove an average of 27.7 miles per day.
But in the next phase, 2005 until 2014, gas prices rose peaking at more than $4 per gallon. By 2013, the average American drove 25.7 miles per day, a decline of 7 percent from the previous era. But from 2014 to 2016, gas prices fell again, dipping to a low of $1.75 per gallon. As a result, Americans drove 4 percent more than in the prior phase.
Finally, from 2016 to 2018, gas prices bounced back, hitting $3 per gallon—and Americans again cut back on their driving, Bloomberg found.
“The lesson here is clear: Cheap gas produces more driving; Expensive gas leads Americans to drive less,” wrote Bloomberg’s Joe Cortright. “That fundamental relationship has important implications for the fiscal, social, and environmental consequences of car transportation.”
As much as Americans like to complain about supposedly high prices, low taxes and high subsidies have allowed us to enjoy some of the world’s lowest costs for gasoline—even as post-pandemic inflation and the Russian assault on Ukraine have conspired to push prices skyward.
Though prices are still much lower than they should be, sticker shock at the pump has social costs that cannot be brushed aside. Gas prices have an economically regressive effect—meaning that they hurt the people most who can afford them least. People whose jobs rely on long commutes, or who make a living transporting goods from place to place by gas-powered vehicle, will take a hit as gas prices rise—the victims of an economy built largely around artificially low fuel costs.
In the long run, however, it will benefit the economy to offer financial support to people who must drive to pay bills, in the interest of promoting higher gas prices. The cost of direct subsidies to low-and middle-income people whose work requires driving would be small, compared to the gargantuan subsidies offered to oil producers now—subsidies which keep gas prices far too low to cover the actual costs of a society built on a foundation of oil. The more pain we suffer at the pump, the more the country can afford to modernize the transportation system. Most importantly, the planet will be better off as the effects of climate change are eased.
When it comes to the price of gas, no pain, no gain, it seems.
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