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Wednesday, April 25, 2012

The Funny Thing about Taxes on Gasoline

     Ever heard that the true cost of gasoline is really between $8 and $15? Well, that's probably not far from the truth. Policy makers have the right idea taxing gasoline consumption since the use of fossil fuels to power vehicles from motorcycles, to airplanes, to cruise ships does produce significant amounts of air pollution annually. The thing is, for a excise tax to effectively force the marginal cost to gasoline consumers to be equal to the marginal benefit to society, there can't be subsidies present that cancel out the tax, and there certainly cant be subsidies that significantly offset the tax, like theere are presently.


     The article What Gasoline Really Costs Us addresses many of the subsidies and costs associated with the consumption of gasoline in the United States. Some of the listed costs and subsidies are not specifically related to the use of gasoline like the cost of upkeep for roads and bridges since alternative fuel vehicles use those as well, but many are useful for gaining insight into the real cost of gasoline consumption. Most direct subsidies to oil domestic oil companies come in the form of tax breaks, decreasing the cost of production for those companies. Other subsides include program subsidies include government programs that facilitate the production of oil and protection subsidies that involve military protection of oil rich regions around the world, taking away individual company's need to finance protection of their own interests. Costs to society of gasoline usage listed in the article don't provide major insights that anyone who has considered the negative effects of fossil fuel usage. It addresses the health costs associated with heavy localized use of internal combustion engines (as in large cities) and general environmental degradation as a result of vehicle emissions and oil extraction. 


     In recent years, we have seen some of the most evocative arguments in history for decreasing our dependence on gasoline to fuel our vehicles and production facilities (not noted in the above article). For one, BP's Gulf Coast oil spill back in 2010 revealed major oversights of safety regulations for oil production. The world was shocked that the Deep Horizons oil rig was not equipped with an emergency flow shut-off feature. Legal compensation to human victims of the spill totaled $7.8 billion, yes billion dollars. This figure does not include environmental cleanup or land restoration, the full costs of which are sill unknown as the efforts have not concluded yet. While events like these are rare, they provide an important illustration of the potential environmental costs of oil production, pardon my French, screw ups.


     The other major argument centers around the fact that oil extraction is becoming more and more difficult domestically, as we exhaust easily extractible sources. One method that companies have turned to is a process called fracking. In the past complaints about fracking mostly had to do with flammable tap water but recently this extraction method has been linked to an increased number of earthquakes. While the proof is still shaky (haha), the potential costs associated with earthquakes are much greater than any environmental concerns relating to oil that we have encountered in the past. I will not make the claim here that fracking is for sure causing earthquakes, but I will say that if it is, oil companies better prepare for some major lawsuits that will end up affecting the price we pay as consumers. 


     It is clear that there are external costs related to gasoline consumption and that an excise tax is the appropriate means of dealing with those externalities, so then why is gasoline subsidized in the United States and around the world? The answer is that the subsidies allow countries where oil production is more costly to artificially reduce the marginal cost of production and keep their domestic producers competitive with foreign suppliers. Given that the world oil market is generally "free," producers who are not able to keep their costs down and afford to remain in the industry should be allowed to fail, but governments do not take this economic perspective on gasoline production. Their goal is to ensure a steady supply to their country so that production of goods and services will not be debilitated in case of a war. I don't agree with them. There is no good reason to subsidize a private producer unless their product has a positive externality, which I'm pretty sure is not the case with gasoline. The subsidies that the US government supplies to oil companies make the tax they impose at the pump almost laughable since there is no way the $0.35 a gallon I pay in taxes offsets their $4.00-$11.00 a gallon subsidy. 


     I do think that a sudden increase in the price of gas that would result from elimination of oil subsidies would have negative economic effects in the short run since companies would not be able to adequately adjust their capital inputs, but in the long run, I believe that it would be beneficial. While costs of goods and services would assuredly increase, the lack of subsidies may prompt more research into less destructive alternative energy sources. Additionally, companies would only use those other sources if they were less expensive than the unsubsidized gasoline, which means that, should a suitable substitute be found, prices would end up decreasing again as soon as the economic and social costs justified it. Don't get me wrong, I would HATE paying $8-$15 for one gallon of gasoline, but just because my (and most likely everyone else's) preferences are such, does not mean that the subsidization of gasoline is efficient or that it should be continued for long into the future. 

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