Gasoline prices: consumers and politicians respond

The trend is clear: demand is down and complaints are up.

U.S. sales of cars manufactured in North America actually rose 1.3% in April 2008 compared with the same month the previous year.



Data source: Wardsauto.com
dom_cars_may_08.gif



But sales of domestic light trucks, which includes the once-almighty SUV category, fell 20.6% in April, even more dramatic than the 18.3% drop between March 2007 and March 2008. Combined sales of domestic and imported cars now outnumber light trucks by a significant margin, the first time that’s happened since I’ve been collecting these numbers in 2003.



Data source: Wardsauto.com
dom_trucks_may_08.gif



U.S. gasoline consumption since January has averaged 1% lower than the first four months of 2007, another quite unusual development:



U.S. finished motor gasoline produce supplied, 4-week averages, in thousands of barrels per day. Most recent year in red, previous year in blue. Data source: EIA
gas_demand_may_08.gif



Counts of the number of miles traveled by vehicles on U.S. roads are also turning down.



U.S. vehicle miles traveled in billions of miles, 12-month moving average. Source: Federal Highway Administration
vmt_may_08.gif



None of which has been accomplished without significant complaining, to which two of our three presidential candidates have willingly hearkened, proposing a cut in the 18.4-cent-per-gallon federal gasoline tax. Although I could easily imagine circumstances in which an 18 cent cut in gasoline prices would not much affect the quantity demanded, my inference from the evidence above is that at the moment, price relief might well bring a measurable boost to demand. Proponents of a gasoline tax cut have an important task explaining where the necessary additional gasoline supply will come from. I think the most natural expectation is that it would come from increased imports which could be diverted to the U.S. if we offered a higher price, though that of course would mean that much of the intended benefits of the gas tax holiday would in fact go to foreign suppliers.

Such considerations leave me endorsing a statement recently signed by many of my colleagues that reducing the gasoline tax would be an inappropriate and ineffective response to the current situation.

To which advice Hillary Clinton has bravely responded:

I’m not going to put my lot in with economists.

And to which Bryan Caplan even more bravely declares I’ll shill for Hillary:

1. The American people want to “do something,” and Hillary’s tax cut will at least do little harm….

2. If (due to highly inelastic short-run supply) 100% of the tax cut goes to producers, that’s not a bad thing. It helps to balance out the long-run disincentive effects of populist measures….

3. The short-run elasticity of supply is probably near-zero for the world market, but Hillary’s tax cut affects only the U.S. So as I argued previously, American consumers will at least get a moderate piece of the tax cut.

It’s nice to see that we have some economists with a sufficient number of hands to be able to lend one to Clinton and McCain.



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32 thoughts on “Gasoline prices: consumers and politicians respond

  1. William Polley

    Professor Hamilton,
    Thanks for the link. WSJ’s Real Time Economics called my post “probably the strongest show of support available” when I said that the tax holiday would be “Maybe not totally pointless, but definitely in the neighborhood.” I thought that was damning with faint praise. But lest anyone get the wrong idea, my criteria for good policy is that it be far away from the neighborhood of pointless. I have, therefore, put my name on the list of economists opposed to the tax holiday as well.
    I was simply making the point that the effect on the consumer would probably be nonzero rather than precisely zero. And after looking at the issue for the better part of the day, I’m still unconvinced that it would be precisely zero.
    Your charts here, as well as one that I posted today and others I have seen elsewhere all suggest that the recent decline in gasoline production (inventories are higher than average and capacity utilization is lower than a few years ago) leaves a little bit of room to maneuver. Not much, but maybe enough to drop consumer prices a couple cents. Not enough to be noticeable except in the rear view mirror of the econometrician.
    The question may be stated more simply this way. How much would prices have to fall to cause consumers to buy up whatever increase in production would be optimally obtained when the tax is temporarily cut? Everything I have looked at suggests that the answer is greater than zero, but not terribly much.

  2. KnotRP

    If prices drop at all, the temporary nature the tax cut will encourage people to load up and top off, and maybe even store some in gas cans. Thus demand will be pulled forward pretty fast. It might be 0, or it might be -0, but it’s probably somewhere inside that interval. And it increases the deficit & debt, so if anyone thinks it’s the least harmless, I have a suggestion:
    Give the president, congress, and the Fed the rest of the year off. Near as I can tell, that’s the plan with the least amount of harm.

  3. bsetser

    Prof. Hamilton — a bit off-topic, but hopefully only a bit. Do you know if the tariff the US applies to light trucks also applies to SUVs? Not that it matters with demand for SUVs collapsing, but your post reminded my that this was something i meant to look into and I wasn’t able to quickly find an answer by googling.

  4. M1EK

    Gasoline is only slightly fungible compared to oil – that’s where the “but the tax cut is only for the US” argument dies. The gas can’t be resold to the rest of the world, realistically.

  5. tinbox

    Prof. Hamilton,
    Since wholesale gasoline prices are up about 30 cents since McCain and Clinton made their proposals, do you still think that an 18 cent tax cut will spur demand over what it was two weeks ago? Or would you say that with prices up now 25% over last summer, we should expect a smaller drop in inventories through the summer and increased pricing pressures on refiners and marketers?

  6. Anonymous

    Tinbox, the relevant comparison is not between the price today and the price last month, but instead is a comparison between what the price would be with and without the gas tax. If you think that quantity demanded would be higher without the gas tax (and yes, I believe it would) then much of the 18 cents is going to end up with domestic and foreign producers rather than U.S. consumers, regardless of where we start prior to the gas tax cut.

    In fact, the implementation of this effect could look much like what we saw play out yesterday. If oil speculators were persuaded that political pressures would require a stimulus to U.S. gasoline demand, they would bid up the price of oil in anticipation of the stimulus. $5 a barrel (the size of yesterday’s move) will mean maybe 10 cents a gallon at the pump. It is possible through this mechanism that much of the benefit to consumers would be eroded even before the proposal is ever implemented.

  7. tinbox

    No, the relevant comparison is between this year and last year. The inventory cycle in gasoline is annual. Economists’ chatter about constraints on supply are entirely misguided. We enter every summer with a large inventory (this year the largest since 1994) that is drawn down by seasonal high demand. Will demand be higher or lower than last year? If the answer is lower (and it will be lower), then inventories will remain quite high. So the pressure will be on the sellers, not the buyers.
    George Frost has an excellent article at http://www.salon.com

  8. Banker

    What is your view on the Tax break for Gas purposed by the candidates. It seems to me as it would have limited impact ?
    Also it would seem to me tht the best way to get crude prices to drop, is to get the dollar to strengthen….
    Any thoughts
    Banker

  9. High Gas Prices

    I don’t think demand is very important. In this situation, Foreign economies pay different rates based on the strength of their currency.
    This looks like a currency issue; not a supply and demand problem.
    Great post!

  10. Clarence Chriss

    Why isn’t Congress doing anything??? It is because they have their hands in the cookie jar! I did not realize this until the other day that the House and Senate aren’t doing or saying anything against the big oil companies. Guys it is time fore us to do something. I propose we create a no drive day. No one drive on that day unless they have an emergecy or have to work. We are not doing enough to hurt them and they are doing everything to hurt us. That so call president is not going to help you. He too absorbed in his own money making schemes. I’m so disgusted with this, I’m acturally sick. America, join with me and let’s figure a way to fight back. Enough is enough. And if we do not take a stance now, we will never have another.
    Please feel free to write me and give me your thoughts. I do not want to hear from you Bush supporters who have blinders on. You are no good to the rest of us! Poor George Bush…My A$$$.

  11. Bruce Hall

    The issue of the federal gasoline tax is a convenient red herring for member of Congress to divert attention away from their own actions to limit domestic supply of oil and create massive obstacles for new refineries… both of which have created the perfect opportunity for speculators to drive up the cost of oil and gasoline.
    On a related topic, the fact that gasoline prices are rising rapidly is exactly what is needed to implement Congress’ distortion of the automotive marketplace through their mileage mandates. In fact, automotive company executives are completely against a reduction of either gasoline prices or gasoline taxes because high prices and taxes are required to sell the small, high-mileage vehicles that Congress has mandated the manufacturers must produce.
    Congress is trying to have it both ways: put all the risk and blame on private industry for implementing or abiding by the very regulations and restrictions Congress has established.
    Recently, Congress, led by Sen. Schumer, tried to pull the same stunt with regard to food prices… pointing fingers at farmers who were diverting some of their crops toward Congressionally-mandated ethanol production increasings… those same farmers who must pay higher diesel prices for their farm equipment because Congress makes refinery approvals so onerous.

  12. fred schumacher

    There’s more to the cost of operating a vehicle than the price of fuel. A gas tax holiday is penny wise, dollar foolish. Reduction in road maintenance will cause more vehicle damage than can be saved from the gas tax cut. America’s road infrastructure is already in terrible shape. This gas tax foolishness can only make it worse.
    I once hit a bad pothole on Interstate 35W in Minneapolis (not far from the bridge that fell — a presentiment of the future, perhaps?). A few days later my transmission self-destructed. The jarring from hitting the hole caused a shaft clip to come loose, allowing the differential spider shaft to slide out, tearing a huge hole in the transmission. It takes a lot of gallons, at 18 cents per gallon saved, to pay for a transmission.

  13. gas additive

    It all seems so strange. I agree with the comment before me that Congress is messing with things and then pointing the finger at the very industries they have messed with. The whole thing baffles me to be honest.

  14. KevinM

    “We are not doing enough to hurt them and they are doing everything to hurt us.”
    My goodness. How exactly is the oil industry out to hurt me? And if I believed that, why would it be in my best interest to try to hurt them?
    Case: The 100-year-old big oil companies (dating back to Standard Oil and before) are using their oligopoly to manipulate pricing and steal my money.
    Theory: I’ve had 100 years to adjust my lifestyle to correct the situation. e.g. Move to a more moderate climate, own fewer cars, drive fewer miles, own higher efficiency cars.
    Practice: I’ve stayed in or moved to climates like New Hampshire, Michigan (heating required), Florida and Arizona (air conditioning required). I’ve bought more cars and driven more miles almost every year. In recent years I’ve chosen SUV’s over compact cars whenever I could afford the capital cost.
    Case: I should punish the evil oil companies. I can punish them by not buying gas during a 24 hour period.
    Theory: If I cause a glitch in their supply cghain, they will lose money.
    Practice: Untried.
    Expectation: There are large inventory buffers that smooth short spikes and skips in consumption. Nothing happens. Any increased operating cost is passed on to customers in the short run, and also in the long run barring changes in long run customer behavior.

  15. don

    “I think the most natural expectation is that it would come from increased imports which could be diverted to the U.S. if we offered a higher price, though that of course would mean that much of the intended benefits of the gas tax holiday would in fact go to foreign suppliers.”
    I agree. Paul Krugman, though, says Hillary’s plan is basically a wash that just moves money around. He is mistaken. There will be a net loss to the U.S.

  16. pianoguy

    Great post. The most interesting chart (to me) is the Annual Vehicle Distance Traveled, which shows a plateau beginning way back in 2005, when gasoline was still in the low two-dollar range. Just eyeballing it, Americans are currently driving 65 to 75 billion fewer miles per year than we would have been driving if the historical rate of increase had continued.

  17. David Fitzmorris

    The answer is simple: 1) Kill all the attorneys
    2) Start building more refineries in the US
    3) Start drilling and producing in Anwar and the eastern Gulf of Mexico.
    4) Let the freakin Arabs eat their oil

  18. Brian

    Instead of a “no drive day” why don’t you try carpooling, driving a more efficient car, or driving less overall?
    Oh, that’s already happening, albeit slowly.

  19. Buzzcut

    I happen to work for an oil refiner, at an honest to god oil refinery.
    Obama and other Democrats are so full of it on this issue, it is not even funny.
    Refining capacity is one of the pieces of the gas price puzzle. There is not enough capacity in the US, and there hasn’t been for some time.
    My refinery is trying to expand, trying to rebuild itself to better be able to refine the ultraheavy crudes available from Canada now, and we are being stymied at every turn by… Democrats. Especially Democrats from Illinois like Obama’s partner in crime, Dick Durban.
    This particular refinery is in Indiana, but just over the border from Chicago. We are regulated by the EPA and the Indiana Department of Environmental Management. IDEM and the EPA have been very fair in terms of the procedure to get the permits we need to do the expansion.
    But at every step of the process, there’s Dick Durban and the Illinois Democrats, saying that the process should stop, that we should be doing more to prevent pollution, well in excess of all existing regulations.
    Dick Durban even wants the EPA to regulate our CO2 emissions! They’re not even regulated.
    So… if my refinery can’t even do a project that will increase capacity by 10%, allow refining of cheaper ultraheavy Canadian crude, and result in an overall emissions reduction of 7%, how on earth are we going to fix these high gasoline prices?

  20. Buzzcut

    As long as I’m on a roll…
    Don’t discount the effect of the new diesel sulfur regs on diesel prices. Every US refiner has new diesel hydrotreaters. Like anything new, there’s a learning curve. High diesel prices may just be a reflection that refiners have not yet mastered these new units.
    And with the new low sulfur diesel, diesel is a lot more refined than it used to be. The higher price may be a reflection of that as well, meaning that higher diesel prices could be here to stay.
    Environmental regulation is not costless. If the American people are upset about gasoline prices, maybe they need to look at the policies implemented by the politicians they elected.
    I used to be a diesel enthusiast (Jetta TDi), but now you couldn’t pay me to drive a diesel. The cost of the fuel more than negates the fuel economy savings. And the new emissions controls have made the initial cost of diesels prohibitive, and the emissions control equipment is unreliable to boot.

  21. Hal

    That’s quite impressive that miles driven has leveled off so sharply the last few years after decades of growth. Stuart Staniford had a series of posts at The Oil Drum back in 2005 (shortly before mileage growth ceased) in which he found a long-term proportionality between miles driven and U.S. GDP. It would be interesting to go back and update the data to see if the recent declines in GDP growth also correlate well with the declines in mileage. See:
    http://www.theoildrum.com/story/2005/10/20/51230/831
    http://www.theoildrum.com/story/2005/10/21/51955/319
    http://www.theoildrum.com/story/2005/10/22/235239/89

  22. GK

    This is good news. This also why higher oil prices are no longer increasing the trade deficit – consumption has dropped to offset the higher price per barrel.
    Also, the final ‘less miles driven’ chart is VERY good news. Traffic fatalities and injuries will drop slightly (they alone cost the US economy $400B a year in medical/legal/funeral/insurance costs). A 10% drop in US traffic deaths/injuries is welcome.
    Less driving, AND a shift to lighter cars also reduces wear and tear on roads, thus extending the life of roads and consuming less repair money.
    All this is good.

  23. Sandman

    The dollar has risen some but Oil keeps on going up. The decline of the dollar since 2000 hasn’t been the reason why Oil has risen. There is another reason and I think most people know that reason.

  24. green marketeer

    Folks
    If you’d like to learn a little more about transportation economics from someone who has been studying the subject for many years, I suggest you check out Todd Litman at Victoria Transport Policy Institute. As Todd points out, the proper response to higher oil prices is not just more efficient vehicles, but a more efficient transportation system; that is, one where all costs (insurance, road use, parking, congestion, and pollution to name the big ones) are paid on a marginal basis instead of the current average basis. Make this change, and the over-consumption of transportation with all it’s attendant problems will tend to resolve.

  25. Sandman

    I happen to work for an oil refiner, at an honest to god oil refinery.
    >>>>>>>>>Which makes your opinion so special?
    Obama and other Democrats are so full of it on this issue, it is not even funny.
    >>>>>>>>>and you do?
    Refining capacity is one of the pieces of the gas price puzzle. There is not enough capacity in the US, and there hasn’t been for some time.
    >>>>>>>>>Nope. Refinary capacity isn’t a piece nor is it why oil prices have rocketed since 2006(I don’t count the 03-05 rise, that was natural)
    My refinery is trying to expand, trying to rebuild itself to better be able to refine the ultraheavy crudes available from Canada now, and we are being stymied at every turn by… Democrats. Especially Democrats from Illinois like Obama’s partner in crime, Dick Durban.
    >>>>>>That stuff from Canada sucks. That is why it isn’t being refined nor being heavily pushed. The fact you buy into what they sell to you speaks volumes about your character
    This particular refinery is in Indiana, but just over the border from Chicago. We are regulated by the EPA and the Indiana Department of Environmental Management. IDEM and the EPA have been very fair in terms of the procedure to get the permits we need to do the expansion.
    >>>>>>>>Who cares
    But at every step of the process, there’s Dick Durban and the Illinois Democrats, saying that the process should stop, that we should be doing more to prevent pollution, well in excess of all existing regulations.
    >>>>>>>>Maybe the process should stop. Since it would do nothing to the price of oil, why waste money in it(Which is what oil companies have been telling us for years and why they refuse to build more capacity which they don’t need) when we should be putting everything into wind,solar and nuclear tech(especially cold nuclear which the government has)
    Dick Durban even wants the EPA to regulate our CO2 emissions! They’re not even regulated.
    >>>>>>>>Durban is drooling idiot but you aren’t saying much
    So… if my refinery can’t even do a project that will increase capacity by 10%, allow refining of cheaper ultraheavy Canadian crude, and result in an overall emissions reduction of 7%, how on earth are we going to fix these high gasoline prices?
    >>>>>>>>By 10%? That Canadian stuff ain’t cheaper nor will it bring down prices. Stop buying the political correct line from your masters.
    You want to fix the gasoline prices? Let time proceed.
    Answer from above: What is causing high gasoline prices? Debt.
    We are near the end of the debt cycle and that has lead to a bubble form in commodities. This time much like in 1979 oil is frouthing at the mouth. Metals have moved higher but aren’t having the bubble they did last time(for obvious reasons) and grains are nuts due to environmental conditions.
    This is classic “stagflationary” phase before the actual debt deflation begets. 1965-74=1996-05: Debt inflationary phase, 1975-79=2006-08: stagflationary phase, 1980-1983=2009-???????: debt deflation stage.
    Buzzcut learn economics. It doesn’t matter what or where a energy product comes from, especially oil and this cycle has been crazy in grain. It is debt and assets looking for return on their money and energy(specifically oil) as the last bubble of all bubbles. Once debt deflation takes hold, the US dollar will skyrocket and assets will selloff including oil in spectaculer fashion. Possible 50% decline for oil in 6 months.
    If you want to debate in 40 years if we should continue with dirty fossil fuels which cause waste and economic waste over better sources like wind,solar and nuclear. Be my guest. But to claim that your little refinaries problems getting a permit for some Canadian oil is why prices are going up is as bad as Al Gore still trying to link Hurricanes/Typhoons to global warming.
    Try harder.

  26. Joseph Somsel

    The proposal for a gas tax holiday was not an economics issue but was at heart a political statement. The economics of marginal cost curves vs consumption, etc are really besides the point. The tax is, what?, 4% of the retail price?
    That political point is the opposition to the perspective of “Green Marketeer” who decries “the over-consumption of transportation.”
    Who the heck is he to decide!
    That’s the point – the voters are asked “Do you expect the freedom to make your own choices?” The hidden message in offering to lower taxes is that some political figures want to raise them “for the common good.”

  27. David Leitch

    Unless things have changed recently USA taxes on gasoline are still very low relative to those imposed by other countries. Gas in Australia is around US $5.20 gallon compares to say $3.75 in the USA. It would be higher again in Europe I think.
    The idea of gas tax holiday in the USA seems crazy. Why encourage more consumption? What you want is to reduce demand, encourage fuel efficient vehicles, public transport, cities where you don’t need to drive to the shop and alternative energy etc, etc.
    USA doesn’t have any real plans for a carbon price, again lagging the world. I’m a great fan of the USA but you guys need to get with the program.

  28. Matt

    I like this quote from Dick Cheney:
    “Let us rid ourselves of the fiction that low oil prices are somehow good for the United States”
    Of course, that was 1986 and he was proposing a gasoline tax to help mitigate the federal budget deficits. Don’t know what he’d say today.
    Me, I rode my bicycle to work. It’s a good way to reduce the amount of gasoline I consume. Transit, carpooling, different living arrangements, the adjustments will be uncomfortable for a lot of people, but we’ve been pretty profligate and a bit of pragmatic thinking would do us some good, rather than whining like a bunch of oil addicts which seems to be the common public response at the moment.

  29. Gary

    A wise post from ‘Joseph’ and a revealingly naive one from ‘green marketeer’ (GM-If you believe in ‘cold nuclear’ why dont you step it up a notch and put antimatter in your tank).
    As appealing as lower taxes may appear, that is clearly to wrong direction. Compare US taxes to the rest of the world. (Do you really like what Chavez is doing with prices in Venezuela?)
    Unfortunately no politician is going to win votes by saying I’m going to raise gas taxes or raise your income tax to pay for war.

  30. Russ

    For a long-term solution to high gas prices, wouldn’t lowering speed limits be a more effective move? Say at least a 5 mph across the entire spectrum, with a maximum of 60 mph?

  31. materman

    We need to be proactive like Europeans, and demand a explaination for increase in oil price. Unfortunately North Americans have attitude that “it is not a problem for me so I do not care”, and that is wrong.

  32. Ronald Gascon

    While I was out campaigning for President the other day (in the most ignored campaign in history), a young man said to me, “if you want to get elected all you have to do is say you will lower gas prices. I told him I have made a lot of promises, but I won’t make any that I can’t keep. At this point there is little if anything that the president can do about gasoline prices. I could nationalize the industry, not really a capitalistic move though. The truth is that gas prices are finally where they should be and our economy is responding, as quick as it can. The plans outlined in my “one big fixx” plan would help give some relief, if the international bankers think that the value of the U.S. dollar is increasing. However I do have to point out that the gas companies are making record profits, while saying our cost has doubled so the price has to double. This is an out and out lie. The cost of an imported barrel of gas has doubled, the cost of a U.S. Produced barrel of gas is exactly the same as it has been for the past ten years and we supply 20-25% of our own gas. Why don’t the gas companies that produce our oil decrease their prices? Because we would use up all the cheap oil and then they won’t make billions of dollars next year. Capitalism there is nothing like it…
    Ronald Gascon Independent man for U.S. President
    Google me I dare you

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