San Franciscans could be forgiven for scoffing at the coast-to-coast outcry over gas prices, which soared to a national average of $4.33 on Friday. A Bay Area gas station posting prices that cheap would be mobbed by motorists who haven’t paid so little since September.
Yet whether you are paying $3.69 in Topeka, Kansas — among the cheapest prices in the nation — or $5.59 on Twin Peaks, among the highest, you are underpaying.
The price consumers pay at the pump reflects the costs to explore, extract, refine, transport and distribute fuel, with extras added along the way to enrich the petroleum industry and comply with federal and state taxes. Among the reasons Californians pay so much is that the state’s 51 cent per gallon tax is the highest in the nation.
However, we are not charged for the pollution, congestion and collisions that are inevitable byproducts of using gasoline. Those costs are borne by everyone, whether they drive a Dodge Ram (12 mpg) a Toyota Prius (58 mpg) or a 10-speed Schwinn bicycle.
Economists refer to these costs, created by individual behavior and paid for by third parties, as negative externalities. They are subsidies that hide the true costs of a product.
Cigarettes, for example, might be just a few dollars a pack if smokers paid only what it costs to grow, manufacture and distribute tobacco, and left society the tab to cover the damage caused by second-hand smoke and the billions of dollars of uncompensated health care.
But a pack of Marlboros costs $12. That’s in part because California adds a $2.87 per pack tax, and the federal government tacks on another dollar. The inflated price not only helps compensate society for tobacco’s burden, it also discourages its use in the first place.
Not so for oil. American taxpayers actually subsidize oil companies — more than $20 billion a year — to keep prices down. And while the federal government imposes an 18.4 cent per gallon tax on gas — 10 times lower than average European tax — the money collected isn’t used to mitigate gasoline’s damage but to build and maintain roads that actually encourage further use.
So what is the true cost of a gallon of gas? Estimates vary widely, depending on whether calculations include the price of global warming, military expenses to protect and obtain oil or the costs of traffic congestion and accidents.
A 2014 report by the International Monetary Fund estimated that if consumers paid the price of gasoline’s full burden, it would add another $1.60 to the price of every gallon. A more recent study by the Center for Investigative Reporting put it closer to $15.
No matter how you look at it, prices in the United States are artificially low, which economists will tell you fuels inefficient decisions.
Let’s say you live in Noe Valley and work in Foster City. If you drive a Dodge Ram, your weekly gas bill at today’s prices would be roughly $125. If you drive a Toyota Prius, that would drop to $25. You don’t need to factor in how your presence crawling down Highway 101 each morning contributes to global warming, adds to congestion or increases the risk of accidents. Society picks up the tab for that.
If you were asked to contribute an extra $5 per gallon, commuting in the Dodge Ram jumps to $230. The Prius would cost you $47. Suddenly the 10-speed Schwinn looks more attractive.
Of course laws of supply and demand, though efficient, are not always wise nor politically feasible. Raising the tax would be devastating to the middle class and catastrophic to the poor. There are ways to handle that. The government could use some of the excess money to expand the social safety net or refund gas taxes to those earning under a certain amount.
But the politics of raising gas taxes — no matter how much it would help the environment, reduce congestion and lower deadly accidents — make it a nonstarter. Elected officials who support a policy that results in $10 per gallon gas, no matter what economists say, would likely face their final term.
So seethe over that $75 bill to fill your tank. But keep in mind that when you see gas approaching $6 per gallon, and if you believe in a free market, you are getting one hell of a deal.
Marc Sandalow is associate director of the University of California’s Washington Program. He has been writing about Bay Area politics from Washington for nearly 30 years.