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Gas Is Still Cheap in the U.S.

March 5, 2011, 4:09 PM

Anyone who drives a car knows that gas prices are going up. The average price of gas in the U.S. hit a seasonal record high in February. Crude oil prices reached a 29-month high of $104.42 in New York on Friday, largely as a result of unrest in Libya and elsewhere in the Middle East. And if the unrest spreads to Saudia Arabia, prices will only go higher.

With the U.S. economy only now really beginning to recover, it’s not a good time for a rise in gas prices. Treasury Secretary Timothy Geithner told Bloomberg that the economy is in a much better position to handle rising oil prices now that it has begun to recover, but that doesn’t mean it is in a particularly good position. Mohamed El-Erian, CEO of Pacific Investment Management, said that the civil war in Libya posed a “systemic” risk and would add “stagflationary winds” to the global economy. And analysts at Morgan Stanley point out that oil price increases of 85% or more led to recessions in the U.S. in 1975, 1980, 1990, 2000, and 2008.

Raising gas taxes right now would only add to the shock. But part of the reason the U.S. is particularly vulnerable to oil shocks is that—as expensive as gas may feel to Americans now—fuel prices are in fact much lower in the U.S. than in rest of the developed world. Americans actually pay about half what Europeans do for gas, largely because we tax it at a much lower rate. As a result America has invested much more in highways than in other types of transit infrastructure, and Americans use much more gas than people in other rich countries. The effect is that the U.S. is much more dependent on oil—and more vulnerable to oil price shocks—than other rich countries.

But if now isn’t the time to raise gas taxes, we need to consider it as soon as we safely can. As Ryan Avent says, there are many reasons to increase taxes on gas:

The current rate no longer brings in enough money to cover current highway spending. Petrol taxes are an efficient way to raise revenue, and the government needs revenue; President Obama's deficit commission recommended an increase in the federal petrol tax rate. Burning oil produces carbon emissions, and dearer fuel would reduce America's sky-high per capita carbon footprint. But a higher tax rate would also diminish the possibility that a sudden rise in oil prices would throw the economy into recession.

Matt Yglesias adds that if you really believe that now is the time to reduce the deficit, then it would be crazy from a policy perspective not to consider higher gas taxes. The reason that they’re not on the table, of course, is that higer gas taxes would be politically very unpopular. But in the end the vulnerability of our economy to the rising price of oil may prove to be the real political risk.

Photo credit: Trevor MacInnis


Gas Is Still Cheap in the U.S.

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