Monday, April 21, 2008

Gas Prices v.2

In my last post about gas prices, I may have been a little harsh. I basically said that people who are complaining about the price of gas are whining. That was maybe a tad hardcore.

Prices at the pump are very high. They are going to go higher. This is a good thing, and our government should act now to make sure that people understand this. Here's why:

People don't actually want to consume gasoline (or diesel), they want to be able to go from place to place. This is different than consumption of some other commodities, like bread or milk, where the amount of the commodity is actually what you want. In other words, if you could travel the same way that you travel now but use half the gas, all other things being equal, you'd use half the gas. But you want to use exactly as much milk as you actually use.

Many people do not have much choice - in the short term - over how much gas they consume. They may not be able to sell their gas guzzler and buy a more fuel efficient car, they may not be able to take the bus, they may not be able to properly inflate their tires (OK - everyone can do that). But other people do have the ability to immediately make some of those changes. If we remove their incentive (e.g. the high prices) they won't make those changes, and we'll continue to consume more gas the is necessary, which drives prices higher. In other words, high gas prices encourage lower gas consumption, and that is a good thing.

If we know that gas prices are going to stay at least as high as they are now, then our economy will adjust to that new reality. Car companies will bring their fuel efficient cars here and domestic car companies will design more of them. People will plan elements of their lives to take into account of these prices. On the other hand, if prices fluctuate and come down for a while, many will assume that the $4.00 gas was an aberration, and will not make the long term changes necessary.

As an aside, everything that I've said for consumers goes double for businesses. Lots of businesses are very energy inefficient. But since savings go straight to the bottom line, investments in energy savings are especially effective, BUT ONLY IF PRICES STAY HIGH!

So what do we do for the people who are hurting RIGHT NOW. That's a real problem, but the solution is NOT to reduce the price, but rather to provide immediate, but temporary, assistance to those folks. We could do this in several ways. One idea would be to send all Americans some money to help. Wait, we're already doing that. OK, we could send more. Or we could tweak the social security taxes to TEMPORARILY exempt the first 10 or 15 thousand of income (this would put about $100 per month into the pocket of every working person).

Of course, at some point we would need to pay for this subsidy. The best way to do that would be with an INCREASE in the gas tax to take place in the near future. The point would be to use this $4.00 gas as a turning point. We should look a this as an opportunity to never let gas drop below $4.00 per gallon again. If our government (in other words us) makes this clear, then the economy will adjust, more fuel efficient vehicles and mechanisms of personal transportation will appear almost as if by magic.

And by the way, gas is actually not really that expensive. It's just that is has been getting less expensive (in inflation adjusted dollars) over the past several years. Check out these sites (1 , 2) for a better explanation.

(and I thought I was a nerd - the guy who did the first chart has kept records of every tank of gas he has bought for the last 30 years - wow)

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