Don't Fill-er-up With Stupidity

People's response to death typically proceeds through various stages: disbelief, denial, anger, bargaining, guilt, and eventually acceptance and hope. Motorists' response to increased fuel price seems to follow similar stages:

• Disbelief – After a lifetime of inexpensive fuel many people simply cannot believe that the situation could change.
• Anger – Yell, spit and scream. This is something to get emotional about.
• Stupidity – Search for a magic solution to make the problem disappear: gizmos, subsidies, prayers...
• Blame – Point fingers outward: big oil companies, government agencies, foreigners, environmentalists, whoever...
• Greed – Demand that fuel prices be reduced, regardless of resulting harms. Convert food crops into fuel. Subsidize fuel production. Reduce fuel taxes. Attack weak oil-producing countries. Drill oil in wildlife reserves, and convert tar sands and oil shales to gasoline, despite social and environmental damages.
• Acceptance – Realize that fuel costs really are increasing.
• Rational response – Prepare for a higher fuel cost future.

Americans are apparently still in the "Stupid" and "Greed" stages. That is the only possible explanation for recent proposals for a federal fuel tax "holiday" and other plans intended to reduce the price of fuel with no consideration to their total costs. These policies are wasteful and unfair on a massive scale.

Prices provide information and incentives needed for economic efficiency. Prices rise when production costs or demand increases, both of which is occurring in petroleum markets. This encourages consumers to consume less and producers to develop alternatives. Maintaining low fuel prices will dig Americans into a deeper hole by delaying the many actions needed by individuals, businesses and governments to prepare for a high-fuel-cost future. Efforts to reduce fuel prices through subsidies and tax reductions are equivalent to supplying more drugs to addicts: it is an easy solution in the short-term, but harmful and costly overall in the long-term.

This policy is also unfair and regressive. A tax reduction of this sort is equivalent to a grant; the same as if the government continued to collect the tax and then distributed money, in this case, based on consumer's fuel purchases. Since fuel consumption tends to increase with income, wealthy consumers would receive far more than poor consumers, and people who lead more energy intensive lifestyles (driving large vehicles long distances) will benefit more than those who are energy efficient (driving more efficient vehicles fewer miles).

According to the 2006 U.S. Household Expenditure Survey the lowest income quintile spent an average of $991 on vehicle fuel in 2006. A 18.4¢ tax reduction per gallon applied to 20% of this fuel (i.e., the summer driving season) would give them at most, $13.51 per household or $7.95 per capita savings, and probably less since some of the savings would be captured by producers (oil companies and distributors would maintain higher margins than otherwise). The highest income quintile would capture more than three times these saving.

To be fair, there are two possible justifications for subsidizing fuel. First, measured in some ways (as a portion of household income by lower-income, automobile-owning households), fuel taxes are regressive. However, fuel taxes are not necessarily regressive overall because low-income households drive significantly less than average and many own no automobile at all. In 2006 (the latest year in which data are available) the lowest income quintile U.S. households spent a smaller portion of household budgets on fuel than the second, third and fourth quintile. If we want to benefit lower-income people, give equal grants to all households or all individuals. Even better, improve energy efficient travel options in order to benefit both those people who currently use those modes (who tend to have lower incomes) and to give consumers an opportunity to reduce their driving and fuel costs.

Second, you could argue that the current fuel price increases were unexpected. For example, as recently as 2007 the US Energy Information Administration's official reports indicated that oil prices would not exceeding $100 per barrel until 2030; we are now at $127. If national experts were so badly blindsided, consumers can be forgiven for feeling tricked. But eliminating federal tax will provide, at best, a 5% temporary savings and exacerbates future problems by encouraging motorists to continue purchasing fuel inefficient vehicles and living automobile-dependent lifestyles. North American fuel taxes are tiny compared with those in most other developed countries and have declined in real terms during the last few decades because they have not increased with inflation. American consumers would be better prepared for current fuel prices if taxes had been raised in the past, giving motorists more incentive to choose fuel efficient vehicles and lifestyles. It's time to get beyond short-term thinking.

Fuel prices are likely to fluctuate, and may decline somewhat for a while, but the overall trend is easy to predict: demand is growing and supplies are not, so the long-term trend will be upward. A basic principle of good planning is that individual, short-term decisions should reflect long-term objectives. Providing options and incentives to help consumers reduce their fuel consumption reflects this concept. Reducing fuel prices does not.

Although it is impossible to predict exactly how much fuel will cost in the future, reducing consumers exposure to this risk requires thoughtful strategic action rather than stupidity. As any good carpenter will tell you, always measure twice before you cut.

For more information see my paper, Appropriate Response To Rising Fuel Prices.