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On Wednesday, President Bush joined presumptive Republican nominee John McCain in supporting the reversal of a long-standing ban on offshore oil drilling. Bush believes such action, along with exploitation of oil shale deposits and drilling in the Arctic National Wildlife Refuge, will reduce the price of gasoline for Americans. This follows the push made last month by McCain and Hillary Clinton for a summer "gas tax holiday." While Democrats dismissed the latest proposal as yet another give away to Big Oil and Republicans gear up to push the issue in November, I can still find no politician willing to state the truth: Gasoline prices should be higher, not lower.

No doubt many Americans feel besieged by rising gas prices, which have risen about 35% in the last year and now stand just above $4 per gallon. But alongside that angst, higher gas prices are sparking urgently needed changes in behavior. Public transportation usage is up, driving miles are down, and the Hummer is rumored to be dead. A similar transformation was underway in response to the oil price shocks of the 1970's when, in what will go down as one of history's great "what ifs," the price of oil plummeted, alternative energy research was scratched, and the incredible environmental crisis we face today became inevitable.
Having failed to learn our lesson the first time, the public outcry over gas prices grows stronger. Indeed, it was enough to ensure that Congress will not touch climate change legislation this year for fear of pushing energy prices higher. Since I am fortunate enough to neither need nor own a car, I feel a bit disconnected from all the hubbub. So it is with genuine curiosity that I ask the question: How much does gas really cost?
The answer is different than the one on the pumping station billboard. Let's try to discern the full cost of our addiction to gasoline: the healthcare costs associated with air and water pollution caused by the nasty compounds released from gasoline, the damage to crops, buildings, and forests, and the tax breaks and subsidies to oil companies. Terry Tamminen (energy advisor to California Republican Governor Arnold Schwarzenegger) tallies these social and environmental costs in his book Lives Per Gallon and comes to the following conclusion:

So there it is, the final Devil's invoice, the amount we pay to keep the needle from hitting ‘empty’: well over $100 billion each year and perhaps closer to $1 trillion. That comes to as much as $2,700 for every man, woman, and child in the United States every single year. That works out to $1 per gallon and possibly as much as $6 per gallon added to the actual price of every gallon…For that kind of money, we could provide health insurance for the forty-five million Americans who have none and build fifteen hundred new schools in every state in the union.1

Those figures don't include the sizable military costs of keeping the oil flowing in less than desirable places, nor does it include the impacts of future climate change in the U.S. due to the 20 pounds of planet-warming carbon dioxide released from every gallon of gasoline. But even this conservative estimate suggests that the true price of a gallon of gasoline right now is not $4 but at least $5 and as much as $10. So from an economic perspective, drivers are getting a very good deal. They are paying far less than the true cost of their actions, with the difference being picked up by others -- like families with children made breathless by asthma and those who walk to work while inhaling carcinogens from tailpipes.
What about our petrol-using comrades in other countries? The American aversion to taxation and political demand for vehicular freedom leads to far lower gas prices than in other countries. A recent survey of 155 countries found the U.S. to have the 44th lowest prices. Compared to our brethren in Western Europe, the differences are shocking. Below is one of my favorite graphs, best viewed with the tune "One of these things…" playing in the background.
Gas PricesEuropeans were paying the same gas prices 12 years ago that Americans are paying today. The difference is driven primarily by fuel taxes. In Western Europe, about 50% of the price of a gallon of gasoline consists of taxes. In the U.S., it's about 15%. Europeans have long been paying gas prices relatively commensurate with the social cost of consumption. The only downside of such policy, as far as I can tell, is a transportation infrastructure vastly superior to America's.
While the recent price rise has been painful around the world, we must accept that higher oil and gas prices are both economically inevitable and socially imperative. Contrary to the election year pandering of some politicians, government policy should ensure that the price of gasoline can only go up (for example, a sliding tax that establishes an effective price floor). This would prevent a painful replay of the opportunities lost 30 years ago.
Politicians should also keep in mind that only the slope of the graph above -- not the absolute levels -- is a source of concern. The pain caused by the distributional effects of quickly rising energy prices (the poor are hurt more) is an argument not for lower prices but for the taxation of polluting fuels and progressive redistribution of revenues, perhaps as part of comprehensive climate change legislation that auctions off pollution permits. Trying to increase supply through such environmentally nefarious ways as suggested by Bush and McCain only further increases the social cost of our addiction and makes it less likely that the positive behavioral change underway will be maintained.
The bottom line is that by not paying the full price of gasoline (or, indeed, any fossil fuel) we have reaped tremendous but ill-gotten gains for decades. These gains come partly at the expense of people in the developing world who endure depravation most of us can barely imagine, since the costs of climate change, including rapid declines in agricultural productivity (see, for example, Bill Cline's Global Warming and Agriculture: Impact Estimates by Country will be felt first and worst by the world's poorest people. Mitigating these impacts will require that we do what is necessary -- not what is convenient. Gas prices are a test case of America's political mettle. I hope voters reward politicians with the gall to tell that truth.
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1Tamminen’s figures are drawn, in part, from a larger study undertaken by the International Center for Technology Assessment in 2005 (http://209.200.74.155/doc/Real%20Price%20of%20Gasoline.pdf). Including a much wider range of costs, including some that are related to driving in general rather than gasoline usage specifically, they arrive at something like $5 to $15 per gallon on top of today’s retail gasoline prices.

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CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.