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Cheap Gas? For How Long?


My local "drug" dealer, also known as Sonny's Sunoco, as regular readers may recall, likes to play roulette with prices. It's not unusual for me to see the numbers on his display board switch three or four times a day, apparently depending upon how his personal trading is going on the spot market.

So I was surprised to see the figures hold steady, this weekend, at $3.79 a gallon of regular, more than 40 cents below the peak price he was demanding of us petrol junkies just a month before. All across the country, the AAA reports, prices are falling, and are now averaging barely $4 a gallon.

(Of course, who would have thought we'd breathe a collective sigh of relief when fuel prices were "only" $4?)

Why the sudden dip? No, it's not because the Saudis are suddenly feeling guilty, nor is it the result of a sudden sense of social responsibility in the ExxonMobil boardroom. It's apparently nothing more than a sign that Adam Smith was right. The invisible hand of the market seems to be working.

As fuel prices soared, in recent months, Americans began cutting back on their driving, whether by carpooling, cutting out unnecessary trips, switching to more fuel-efficient vehicles, or canceling their cross-country vacations. Whatever the reason, the nation sucked down 2.4 percent less fuel during the previous four weeks than it did during the same period in 2007. And that's helped drive down the price of crude by more than $20 a barrel since its July 3 peak of $145.31 - to a Friday close of $123.26.

Of course, that seemingly direct link between fuel consumption and fuel prices could work against us, if motorists wind up driving more now that fuel is, ahem, affordable again. Relatively, anyway. What was $72, on average, in 2007, is still expected to be $127 a barrel in 2008, and $133 next year, according to the energy Information Administration.

But unlike years past, when the laws of supply and demand were pretty much directly impacted by what happens on U.S. shores, the situation has changed dramatically in recent years, as more and more of the emerging world discovers the automobile.

China has become the world's third-largest motor vehicle market, behind only Japan and the U.S., and with millions more cars and trucks taking to the road each year, its appetite for petroleum has soared. The same thing is happening in India, Russia, and, well, much of the world. But while usage is soaring, supply has held relatively steady.

The situation is compounded, warns an article in today's New York Times, by the fact that consumers in many of these emerging markets aren't actually feeling the real pain of petroleum's record run-up. Indonesia, for example, is spending 4 percent of its entire economic output in the form of fuel subsidies, helping maintain gasoline prices of around $2.30 a gallon. In Malaysia, the subsidies amount to 7.5 percent of economic output.

China is spending about $40 billion to subsidize fuel costs, though it did allow gasoline prices to rise significantly on June 21. As the Times notes, that immediately drove down world oil prices by a whopping $4 a barrel. There's the possibility of still further increases in Chinese gasoline prices after the upcoming Olympics. Observers expect the government to wait rather than risk protests that could be picked up by the world's media, descending on Beijing.

While subsidies might ease the burden on third-world consumers, the problem is that low prices do the same thing, in places like China and India, that cheap gas did in America, it encourages consumption and limits the viability of conservation. And with little growth in global petroleum supplies, the fast-rising demand from these markets will continue to push up the cost of crude, even if Americans maintain their newfound focus on fuel efficiency.
 
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Comments (8)
  1. I filled up last week for 3.79. It's interesting to ponder what could happen. Are people dumb enough..to start buying big vehicles again if the price drops to near 3/gal ?
    Now that the automakers have committed to building smaller cars, could this endanger them further ? I read somewhere last week that highway revenues are down significantly because of decreased driving. I wonder if a gas tax increase could be in the cards.

  2. The Democrats in the House are already working on the bill. They want to add $0.10 per gallon to the already high federal tax. I would guess some states are thinking the same.....

  3. I'd say our gas tax of 18.4 cents per gallon is low, considering that at $4 a gallon the federal gas tax only constitutes 4.6 percent of the total purchase price. If gas continues to drop the States should sieze the opportunity to raise gas taxes to pay for roads and decent public transportation. They would be welcome to get rid of the income tax while they are at it.

  4. Wow, because people are used to paying high prices, the gov't should sucker us with a tax increase we might not notice?
    Your thought is to pay for roads and decent public transportation?? How are your roads paid for currently, charity?
    Why do you think gas purchasers should pay for public transit? Wouldn't it be a little more equitable for public transit riders to pay for that instead?

  5. Hey Tom, If you want to pay more tax, I'm sure the IRS would take any check you send them.
    I just feel that 18.4 cents tax on a gallon is not added value for me. I know the money is for road construction and maintainence but I know that the system is so waste filled that we are not actually getting the full value that we are paying. I don't want to send any more $ to DC.
    I have yet to see any tax (income or otherwise) eliminated. Taxes are forever.

  6. PG-If you look into you'll find that the IRS actually has a mechanism for citizens to voluntarily make donations to the Federal Government. I wonder if anyone has ever done it?
    I said the states should take charge with regards to fuel taxes because I agree the Federal Government is too bloated. Neither the GOP nor the Democrats have seemed the least bit inclined to reduce the size or reach of the Feds.
    To Bob's point it's tough to argue that public transportation shouldn't have to pay for itself.
    Taxes are one of lifes 2 certainties but tax structure is not. Go to www.taxfoundation.org to find more info on how profoundly our taxes have changed over the last century. I don't think it's unreasonable to demand the state and federal government shift the tax burder away from income and towards consumption.

  7. I used to think that we should raise the tax so that consumption would go down and also, it would mean less money going to oil producers that hate us.
    With this recent oil shock that we have had, i'm more concerned with how the oil prices increase inflation. Also, I don't see how our raising taxes on gasoline is going to affect oil consumption in China and India. Maybe it would be good for oil prices to plunge for a while to help moderate inflation.

  8. Tom, I don't think it's unreasonable to shift tax structures either. Paying for services is a great idea, though consumption doesn't quite get you there. However, raising gas taxes isn't going to change tax structures. It'll just mean you pay more tax than you do now.

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