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HomeEconomyWhy United States may turn gasoline prices into a political timebomb

Why United States may turn gasoline prices into a political timebomb

U.S. gas prices hit a record level earlier this month. Limiting 'pain American people are feeling at the gas pump' was a main objective Biden set out in responding to Russia’s invasion of Ukraine.

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Judging by the amount of public comment in English-language media, the world is on the brink of derangement about the state of gasoline prices.

U.S. gas prices hit a record level earlier this month. Limiting “the pain the American people are feeling at the gas pump” was one of the main objectives President Joe Biden set out in responding to the start of Russia’s invasion of Ukraine last month. The situation has even been blamed for the sinking of Sarah Bloom Raskin’s nomination to become vice chair of the Federal Reserve.

That seems justified by public interest in the subject. Going by Google searches, concern is the highest it’s been in years:

Poor little rich kid

What’s curious is that much of the world doesn’t see things the same way. Look, for instance, at the major emerging market oil consumers, and while there’s some concern, the current moment doesn’t look nearly so exceptional.

Running on empty

That illustrates one malign form of American exceptionalism. The cost of energy is a crucial input in every economy on the planet, but there’s few places where pump prices are such a persistent and problematic political issue as in the U.S.

Why should that be? One reason is that most other countries use the public purse to dull the impact of oil prices. Oil exporters tend to heavily subsidize the price of transport fuel, while importers aggressively tax it. That draws the poison from the public debate. The relative lack of interest in oil-importing India of late, for instance, is likely due to the fact that prices to consumers have fallen around 12% since a tax cut last November, despite a 43% increase in the rupee value of Brent crude over the same period. Similar moves to cut gas taxes are now underway across Europe, too.

Fueling Discontent

Oil-importing rich countries in Europe, northeast Asia and India typically fret about the impact of fuel on their trade balance, and tax it heavily to discourage consumption. America’s unusually low gas taxes more closely resemble those in oil exporting countries.

That’s no accident. The U.S. did indeed spend the first half of the petroleum era as one of the world’s biggest crude exporters, and the second half as its biggest importer. (Things have only started to flip in the past few years, as the shale boom has driven net imports toward zero and China has overtaken as a bigger buyer of foreign crude).

Don’t get high on your own supply

As a result, it’s ended up with the worst of both worlds: Sprawling cities, inadequate public transport, and minimal fuel taxation combining to expose its most vulnerable citizens relentlessly to the ups and downs of a global commodity market.

How can this problem be fixed?

One part of the solution would be to take advantage of the next price fall to give the U.S. a proper system of fuel taxation. That’s what Indian Prime Minister Narendra Modi did after crude’s 2014 slump, keeping pump prices fairly stable while taking in an increasing share of the retail cost as taxation. Such a move will be challenging in the U.S., where Congress must take politically difficult votes on tax rises. Legislating a one-time increase in rates before indexing the tax to inflation, however, would help insulate the issue from Washington’s veto.

Evidence from other countries suggests such a system won’t upset the voters if it’s introduced sensibly. Inflation causes discontent if it’s an ongoing problem, but incremental, one-time shifts in costs — especially if introduced against the backdrop of falling commodity prices — quickly become part of the cost of living, and end up compensated by reduced spending elsewhere. For all that American politicians fret when the price of gasoline has a four in front of it, their European peers have survived for decades with prices that never fall as low as even current record U.S. levels:

Everything’s relative

Transport fuel that’s properly priced needs to be combined with measures to reduce demand — first by increasing fuel economy standards to match those in other rich countries, and then by investing in public transport and greater urban density to give people an alternative to driving.

As an ever-increasing share of the car fleet switches to electric vehicles, those measures ultimately will need to be enhanced with levies on miles traveled and single-occupancy driving to account for the declining share of road power coming from fossil fuel. In the near term, though, the priority should be on increasing gasoline and diesel taxes to a level where they start encouraging consumers to switch away from their current wasteful habits.

Fill her up

It’s paradoxical that America has ended up with such a harmful equilibrium around transport fuel. Politicians generally like to limit the number of issues that could blow up in their faces, but they’ve done precious little over the years to reduce the explosive potential of gas prices. When crude prices start falling again, as they inevitably will, Congress should gird itself for change. It’s time this bomb was finally defused.


Also read: War no bar: India clears global pariah Russia’s move to invest in Indian corporate debt


 

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