The true cost of gasoline

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The New York Times’ oil map now includes a close-up of the landfall area around the Gulf Coast.

In Sunday’s Washington Post, Ezra Klein provides some much-needed context as to the true cost of oil, and in turn the gasoline we buy to power our cars.  The key part is framing the overall cost in terms of externalities:

Most of us would call the BP spill a tragedy. Ask an economist what it is, however, and you’ll hear a different word: “externality.” An externality is a cost that’s not paid by the person, or people, using the good that creates the cost. The BP spill is going to cost fishermen, it’s going to cost the gulf’s ecosystem, and it’s going to cost the region’s tourism industry. But that cost won’t be paid by the people who wanted that oil for their cars. It’ll fall on taxpayers, on Gulf Coast residents who need new jobs, on the poisoned wildlife on the seafloor.

That means the gasoline you’re buying at the pump is — stick with me here — too cheap. The price you pay is less than the product’s true cost. A lot less, actually. And it’s not just catastrophic spills and dramatic disruptions in the Middle East that add to the price. Gasoline has so many hidden costs that there’s a cottage industry devoted to tallying them up. At least the ones that can be tallied up.

Klein lists pollution, congestion, the need for our military to secure oil reserves, and citing some other research from Ian Parry at RFF, he concludes the premium is $1.65 per gallon of gas – which put on top of the current average cost per gallon of $2.72, would mean we’d need $4.37 gas to cover the true costs – a number Klein notes is almost certainly an underestimate.  However, Klein notes that while higher gas prices would certainly curb some driving (and data suggests this to be true), the larger move over the past decades has been the entrenchment of our auto-dependence, and thus our gasoline dependence.

The key to reducing use is to provide alternatives:

That gets to the bigger issue, which is that energy sources are cheap or expensive only in relation to one another. And the heaviest anchor beneath our reliance on oil is that, at this point, there’s nothing to replace it with.

“We’re pretty much stuck with our dependency on oil,” Parry says. “We don’t have any substitutes. Even if we hugely increase the price on oil, we’d only have limited impact on it. People need to drive and get to work.”

In urban situations, reducing oil use means reducing driving.  A key part of that equation would be to provide more alternative transportation modes. If we were to raise the price of oil via an increase in the gas tax, that revenue could be used directly to build those new transportation infrastructures – internalizing the externality.

In other urban, externality pricing schemes, linking the revenue generated from the tax to a tangible benefit for users is the key to gaining political support.  Donald Shoup talks extensively about funneling parking revenue to parking benefit districts; polls in New York suggested that dedication of congestion pricing revenue to transit improvements was the key to securing popular support (if not legislative support). Linking revenues to the tax is a key part of helping people understand the value of the virtuous cycle – no matter how counter-intuitive it might be.

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