The Real Price of Gasoline

by Richard T. Stuebi

A couple of weeks ago, 17 Democratic governors, including Governor Strickland of my state of Ohio, sent a letter to President Bush urging that something be done to lower gasoline prices. (News release and letter text on Governor Strickland web site)

I was contacted by an Ohio AP wire reporter to comment on this letter. In responding, I said such a letter was at best naive -- just what can the President really do to lower gasoline prices? -- but more importantly ill-advised. Higher energy prices help us reduce our "addiction" to oil from sources of increasing concern, as well as reduce emissions and encourage the development and adoption of new energy alternatives. In other words, I had the gall to claim that higher gasoline prices were actually good, not bad.

Of course, this was not exactly a popular position to take, and my quotes generated a bit of buzz across the state. (See example from the Coshocton Tribune) A key element of my argument was that customers are prevented from facing the true cost of gasoline, as the expenditures on military protection of oil production, refining and transportation in and around the increasingly dangerous Middle East are not recovered through gasoline taxes, but rather through income taxes.

I recalled a presentation I had heard from last summer, suggesting that these subsidies were on the order of $10/gallon. The problem was: my memory was vague, I had never seen the actual study, I wasn't sure that I fully believed the results and couldn't confirm its validity, but I knew that the conclusions were at least directionally correct. So, I weaseled in my interview, saying something like "Some observers have calculated the subsidy at $10/gallon." Naturally, the reportage indicated that the $10/gallon figure was mine. I assure you: it wasn't. I have told many people that my instinct (without any substantiating analysis) suggests that the subsidy is probably in the $3-5/gallon range. Mind you, still a meaningful number, any way you slice it.

So, after the interviews and articles, I went back to find the study that was at the root of my recollection of a $10/gallon subsidy figure. The analysis belongs to Milton Copulos, the President of the National Defense Council Foundation. Mr. Copulos apparently updated his work this past January, and he now suggests a subsidy of $8.35/gallon of gasoline refined from Persian Gulf oil. Since the Persian Gulf reflects roughly 40% of world oil production, this implies a $3.35/gallon subsidy when spread across all gallons of gasoline. That's more in line with my expectations.

Again, a meaningful number. It means that gasoline prices should be, not $3/gallon, but on the order of $6/gallon, about what gasoline prices actually are in Europe. Moreover, this price level doesn't include the environmental costs associated with burning gasoline. How much additional might this represent?

All told, my idea of a phased-in gasoline tax increase still seems sensible to me, so that the price signals to customers would begin to more closely match the true full cost of oil exports out of the Middle East. I was pleased to note a Cincinnati Enquirer editorial that was generally very supportive of my arguments, though less ambitious than my yearly 50 cent/gallon increase.

I don't expect to win any votes with this position -- not even in Cincinnati. Thank goodness I have no political aspirations.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.