Thursday, December 23, 2010

Gasoline Price Comparisons: Taxes not Octanes Matter

The original subject is gasoline prices but before we know it, the story becomes about taxes. The graph below shows the stark contrast between 10 states in the U.S. and 10 countries in the European Union, or E.U.

Among the states shown, the lowest gas price is in Oklahoma at $2.532/gallon and the highest is in Hawaii at $3.54/gallon. This one dollar difference is actually a 40% difference. Among the EU countries shown, the lowest gas price is in Spain at $5.496/gallon and the highest is in The Netherlands at $7.382/gallon, a 34% difference between them. The gasoline price in The Netherlands is 110% higher than Hawaii’s. (June 2010 US$ and EU euro rates.)

A similar situation is observed for a small sample of worldwide islands (see below). Most island gasoline prices are twice as high as those in Hawaii. Despite the high prices, all cities in the islands shown have significant problems with congestion. This is because gasoline pricing tends to affect vehicle choice, and has a small effect only on vehicle ownership and use.

At places where gasoline price is relatively low, the typical vehicle has a V6 engine and delivers about 20 mpg in city usage. At places where gasoline price is twice as high, the typical vehicle is a 3 or 4 cylinder subcompact delivering about 40 mpg in city usage. So based on these vehicle choices, driving 12,000 miles per year at either place costs the same for fuel.

Going back to the first graph and comparing The Netherlands with Hawaii we ask: What can possibly explain a 110% difference for the same gas? It’s not technology, it’s not manufacturing, and it’s not transportation. These are less than half of the story. The “larger half” is taxes! See below:

Governments worldwide use taxes to finance general budgets and other infrastructure. Fuel taxes are among the first to be increased when budgets cannot be met. The price of gasoline is “inelastic” as economists call it, that is, a large change in the price of gas (say, +30%) does not correspond to a proportionally large change in highway travel (-10%). This is generally true for urban travel and less so for intercity travel where larger travel reductions may be observed.

Overall the lesson here is that taxes on gasoline are a cash cow for governments. Gas tax does practically nothing in reducing congestion. It may reduce pollution somewhat by forcing lower income people to purchase smaller cars, but it does this at a very high overall cost. The overall cost is high because a large part of the economy worldwide “rides on the streets.” Foods, goods and services need to be brought to the market, delivered, installed and maintained.

Expensive gas makes for expensive commuting, repair services, food and appliances. Gas taxation limits mobility, slows economy and reduces the standard of living.

In more general terms, high energy costs exacerbated by heavy taxation on them are a brake in progress. For a vibrant economy, countries and regions need to optimize their energy portfolio and reduce the taxes on it.

Hawaii energy costs are high and climbing. If the status quo continues (oil dependency and heavy subsidies on low productivity and hyper expensive alternatives), then by definition Hawaii’s long term economic outlook cannot be rosy.

Acknowledgment: Recent civil engineering graduate Michelle Coskey
conducted a large part of the research and data compilation in this article.