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Gas prices: Too high or too low?

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Opinion pieces and speeches by EPI staff and associates.

[ THIS PIECE ORIGINALLY APPEARED IN TPM CAFE BLOG ON MAY 20, 2007. ]

Gas prices: Too high or too low?

By Jared Bernstein

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The price of a gallon of unleaded gas is up 43%, or about $0.93, since January of this year. Hourly wages for most workers, before inflation, are up less than 2%, or about $0.30.

Ergo the squeeze on family budgets, right?

Well, maybe not. Or, maybe so, but maybe that’s okay. That is, not really okay, but…well, you know.

It’s common among those of us who want conservation to play a much larger role in our environmental policy to advocate for higher gas prices to discourage driving and encourage efforts to conserve energy. Of course, we’re usually talking about a gas tax in this context, and I’ll get back to that, but the point is: price signals matter.

Demand for gasoline may be inelastic in the short run, but history shows that if prices stay high, good things happen. People drive less, invest in cars (as in “not trucks/SUVs”) with better mileage, Congress starts talking about fuel economy standards, and even Detroit starts to think about high MPG.

But what about those of us who worry about families not having enough disposable income to make their budgets, to say nothing of putting a little something away for a cushion against future losses or the kids’ college fund?

And what if we’re the same person worrying about both?

I, for one, both welcome higher gas prices because they incentivize conserving, and bemoan them because they squeeze most families’ budgets.

That’s most, not all families. Higher gas prices act like a regressive tax: they fall most heavily on those who can’t escape them and are less able to afford them. According to the Bureau of Labor Statistics, families with incomes of around $35,000 spend about 5% of their income on gas for the car. (That’s 2005 data—the most recent—since then, as noted, gas price growth has far outpaced middle-income growth, so that share has likely gone up.) For families that average around $250,000, it’s 1%.

Part of the problem is stagnant earnings, and the fact that too many working families haven’t been getting their fair share of the productivity growth they’ve helped to generate. Our work at EPI on families’ abilities to meet their budgets, including housing, health care, child care, along with transportation, show significant shares of families are increasingly pinched by these expenses. And right now, along with rising gas and food prices, lots of people are paying more for health care and some are being hit with big upward resets in mortgage payments.

But the biggest issue here is where all that gas money goes. The profits of the oil companies are through the roof—Exxon Mobil’s $40 billion last year was the largest annual profit in history. And while they run ads claiming either a) they’re really not that profitable, which is laughable, or b) they really are, but they’re investing it in alternative energy research, forgive me if I’m unconvinced. And I haven’t even brought up the billions of dollars of subsidies big oil got in both the Clinton and the Bush years.

The fact is it’s tough to get in front of a painful prescription—higher gas prices—if it’s simply going to enrich oil companies, exacerbate inequalities, and not finance a progressive agenda, environmental and otherwise.

People often point out that in Europe, they don’t complain about gas prices that are much higher than ours (well, maybe not much higher than California’s are right now). But, and I’m speculating, that’s partly because the profits help to finance national health care, higher education, a much less porous safety net, and a greener enviro policy set.

So, before anyone applauds higher gas prices for helping to push us toward greater energy conservation, we might want to go after some of the industry’s windfall profits, and sink them into a progressive agenda. That seems like one good way of unifying dueling concerns for the globe and the wallet.

Jared Bernstein is a senior economist at the Economic Policy Institute in Washington, D.C.

[ POSTED TO VIEWPOINTS ON MAY 23, 2007. ]


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