Here we go again!

Gas prices are surging and it's not good (here's the Economists take). The one thing that can derail our recovery would be a spike in gas prices and it looks like that is about to happen. The question now is there anything we can do? In the short run the answer is no. Unless we want to end up like the early 80's (double digit inflation and unemployment) our hands are tied. Households will feel the pinch, spending will drop, and the economy could easily enter into another recession.

In the long run (which means this policies should have been implemented 10 years ago) we need to push for higher fuel standards and encourage households to buy more fuel efficient vehicles. How could this have been achieved? You guessed it, a gradual increase in gas prices. Ten years ago the economy was robust and growing (one minor recession), if gas priced increased by 0.10/gallon households would have slowly shifted their purchases into more fuel efficient cars. We would be further along in the development of alternative energies, and most importantly we would have reduced the dependency on oil.

Today the average American drives a car that gets 22 mpg (not much higher than 10 years ago) and drives 15,000 miles per year which results in consuming 681 gallons of gasoline per driver. This means the average driver would pay $68 more per gasoline if we raise the price by 0.10. Since we also know the US consumes 72,000 million gallons of gasoline per year (this is 72 billion gallons of gasoline). Dividing the 72 billion gallons of gas by the 681 gallons consumed per person gives us about 105 million drivers (which sounds about right). Now what if the 105 million drivers drove cars that average 30 mpg (this is not an unrealistic assumption given the average new car purchased gets 28mpg). We would then consume 500 gallons of gas per person and a total of 52 billion gallons of gasoline. There are approximately 44 gallons of gasoline in a barrel of oil. By saving 20 billion gallons of gasoline (that's a lot of gasoline) we would reduce our oil consumption by 450 million barrels of oil.

(Two effects I'm not accounting for (1) some people may drive more with more fuel efficient cars (2) some people may drive less because of more expensive gasoline. Let's assume these effects cancel each other out, but I would actually think (2) would outweigh (1) especially with promoting mass transportation and alternative energies)


Is 450 million barrels of oil a lot? We consume an average of 9-10 million barrels per day. So 450 million barrels amount to 45 days worth of oil which means we would reduce our oil consumption by 12% (I think this is a very conservative number, I think we would actually be consuming less than 52 billion barrels of gasoline prices increased).

How much do we save? If a barrel of oil costs $100 and we would save 450 million barrels of oil that results in a savings of $45 billion per year. Now that's a lot of money. Now what about that tax? On average Americans would have paid $68 per year for a total of $700 million (105 million drivers each pay $68).

So what I'm saying is pretty simple, we could have raised gasoline by 0.10 per gallon per year which would have encouraged the American household to buy more fuel efficient vehicles. Car manufactures would have emphasized higher fuel standards and developed alternative energies. It's not unrealistic to assume an average fuel standard of 30 mpg which results in a savings of $45 billion at a small price of $700 million. Now yes, the benefit would not be as large during the first few years, but after a few years the benefits will significantly outweigh the costs. Only if we had thought about this 10 years ago. Oh wait economists did, but no one listened.