MSN Money: Why We Need $4/gal Gas

[Patrick Degan]

This article appears on today's MSN Moneycentral page, more indications of a possible sea-change in American thinking:

The Amateur / Vad Yazvinski7/22/2008 12:01 AM ET
Why we need to keep gas above $4
A new gasoline tax that ensured high prices would accelerate the move toward fuel-efficient vehicles and provide enough revenue to allow a cut in corporate taxes.

On the surface, the market's behavior on certain days of June and July has been so illogical that my brain simply has refused to accept it. Double-digit intraday swings in prices of stocks without any material catalyst have become routine.

But last week's trading has finally explained what should have been clear for a while: Though current economic troubles may have started with lax credit and underwriting standards and the ensuing subprime-mortgage fiasco, they will likely continue or end based on the behavior of another, seemingly unrelated macroeconomic input: oil prices.

Forget the naked short selling hype or the problems of Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). These are simply headline grabbers and symptoms of the U.S. economy's problems.

The seemingly unstoppable rise of oil prices over the past several years has brought chaos and pain to so many sectors of the economy that even presumably conservative U.S. politicians have called for a gas tax "holiday" to give consumers short-term relief at the pump.
However, the solution to our economic woes lies actually in the opposite direction: making sure prices for gasoline stay high long enough. Let me explain.

An addiction that can be broken
Many economists have argued for years that even a doubling or tripling of oil prices would have little effect on demand because of that demand's inelasticity. U.S. consumers are supposedly so addicted to gas-guzzling trucks and SUVs that pretty much every politician and economist out there has ridiculed suggestions that demand could decline.

One might argue that this notion was supported by hard data. Even when oil prices doubled and tripled from their multiyear lows of the early 2000s, the growth in demand did not really slow. But contrary to the conventional beliefs, the "unthinkable" finally happened this year: Sales of cars overtook truck and SUV sales, and gasoline demand faltered.
According to the data from the Energy Information Administration, gasoline demand in the U.S. has been running consistently below last year's levels. Though it is difficult to pinpoint the exact price level that triggered this seismic change, the demand for the supposedly inelastic product started to decline somewhere around $4 a gallon.

One might say it wasn't just the price at the pump but rather combination of several economic woes that has led consumers to cut back. I agree, but only to a point. I don't think it was by accident that the sectors that have declined the most recently -- auto manufacturers, airlines, convenience stores, casinos, hotels, car rental companies, restaurants, etc. -- have one ingredient in common: They are particularly affected by high energy prices.

So instead of debating the causes of today's oil prices -- peak oil supply, demand in China or whatever -- we should thank Wall Street and Ben Bernanke and company at the Federal Reserve for finally showing us how this oil dilemma could be solved.

I think it could be accomplished only by making sure the prices for the most widely used petroleum product, gasoline, never again decline below the level that seems to have triggered change, somewhere around $4 a gallon. Raising fuel taxes would likely make things better, not worse. Before sending me an "I hate taxes" e-mail, consider instead sending a letter to your politician asking him or her to raise taxes.

Take a look at the facts: Damage to the most energy-sensitive sectors has been done already, and Americans are already paying a hidden oil tax. But instead sending of our money to Washington, we are now sending it to the other governments around the world, and it's not a small bill. In 2007, the U.S. petroleum import bill came to an astounding $331 billion. In the first five months of 2008, the total was $191 billion.

The upside of a higher gas tax
Yes, even though I believe government intervention is usually a bad thing, establishing a variable gasoline tax that ensured gasoline never declined below $4 a gallon could alter the dynamics of the global economy and help the U.S. maintain its economic leadership status for years to come.

Economist Gregory Mankiw has estimated a $1 tax increase on gasoline could raise $100 billion in revenue that could (and should) be used to reduce the ridiculously high U.S. corporate tax rate. That, in turn, could lead to more jobs and better pay in virtually all domestic industries.
A variable tax on gasoline would accomplish another important objective: Knowing for certain that gas prices would never drop back to $2 a gallon, consumers and manufacturers would rapidly accelerate the shift to more-fuel-efficient vehicles. This would reduce long-term gasoline-demand expectations and could lead to lower short-term energy prices for the struggling energy-sensitive sectors of the U.S. economy.

During this election year, I don't expect any politicians will have enough courage to propose raising gas taxes. But maybe if plenty of us ask, they'll at least listen.

For now, the direction of the U.S. stock market and the economy will likely be determined by the direction oil prices are heading. And given how painful last week's losses must have been to the seemingly bulletproof Wall Street buy-energy, short-financials strategy, one would expect that Goldman Sachs (GS, news, msgs) and company are now busy preparing another "Oil prices to hit $200 by Labor Day" report and writing big donation checks to the powerful ethanol and environmental lobbies that might just lead to another price spike.

Mankiw's argument is for financing a lowering of corporate taxes through this mechanism. Instead, a higher gasoline tax is best used as it is used in every other advanced industrial nation; to finance mass-transit and foster alternative energy develoment. The economy will see far greater long-term benefit by taking an aggressively proactive approach to weaning the U.S. off the oil teat.

[Illuminatus Primus]

I'd low the corporate tax rate as part of a comprehensive scheme on heavy industry companies, energy companies, and domestic industries. I would not lower it on luxury and service industries.

[Darth Wong]

How would lowering the corporate tax on any industry do more to wean us off oil than aggressively investing in alternative energy at the government level? Neil Armstrong did not land on the moon in 1969 as a result of reduced corporate taxes.

[Admiral Valdemar]

We're not getting weaned off oil. Period. There's more to oil than gasoline, I'm sorry to say. The idea of energy independence for the US in any meaningful time-frame is folly. A Marshall Plan scale movement would be needed, and the US doesn't have the cash, nor indeed, political will to do so.

However, just moving to Eurotrash or Japanese(trash) bubble cars would save you all a lot of cash. One way or another, the US is going to. The Chinese, Indians, Russians and Arabs are all loaded and ready to explode their drivers number, so we in the West will be cutting back anyway.