Lower gas prices and higher consumer welfare for the win.

I read the following passage at Carpe Diem (emphasis mine):

According to the Department of Energy, Americans buy 365 million gallons of gasoline every day, so every one cent drop in prices at the pump saves consumers $3.65 million per day, and $1.33 billion dollars over a year. Therefore, the 42 cent drop in prices since April will save US consumers almost $56 billion over the next year compared to what they would have paid if gas remained at $3.70 per gallon.

Think of an increase or decrease in the price of a good (or service) as a transfer of purchasing power from producer to consumer and vice versa.

When the price of something that is effectively a fixed "need" in the short term (gasoline, some food items, a utility bill, etc) changes is has a large impact on our individual welfare and consumption possibilities for other goods/servics that are more "luxuries" (by way of a very lenient definition) to us.

Those saved dollars from lower gas prices might not be explicit to us but they do appear elsewhere in the bundle of goods/services we consume on a regular basis.

I would think a good portion of that $56 billion shows up in retail spending such as food away from home, entertainment, and whatever you might buy at the Mall/Walmart after you fill up the tank.

In terms of GDP it is a wash.  Either the fuel companies get the money or you do and in turn other businesses get it when you spend it.

However, in terms of our standard of living, individually we are better off because we get to purchase other stuff with the extra money from lower gasoline prices.

This "surplus" welfare for consumers is not captured in the GDP accounting.

However, it is captured in my heart.  I LOVE MY SURPLUS!

Demand for gasoline is down and fuel efficiency is way up. Who gets the credit? See the answer here...

I may be suffering from a mild case of the "correlation is causation" fallacy, but the other day I posted the second graph you see below and suggested fuel efficiency was one of the factors in "demand destruction" of fuel consumption in the US. 

Today, I saw this graphic posted at Quartz that shows the change in fuel efficiency in Miles Per Gallon (MPG) change for cars and trucks over the last 35 years.  After a 20 year decline in efficiency from 1985 to 2005, efficiency shot up (yellow highlight).

Which auto manufacturers are leading the charge in making fuel efficient vehicles?  Scroll down, I will meet you there....

Source: Quartz

Surprised?  Probably not.  The first 7 out of the 11 listed are "foreign" manufacturers (not that there is anything wrong with that!).  They all have a significant manufacturing presence in the US, so it is all good.  :)

Nice graph that shows the leveling off of fuel consumption for the foreseable future in the US. How can this possibly happen?

Americans are using less fossil-based fuel than prior to the "Great Recession" and it looks like it is going to continue based on projections from the US Energy Information Agency (USEIA). 

Reasons I can think of off the top of my head:  Persistently high gas prices over the last few years have "nudged" people to trade up (down?) to more fuel efficient vehicles, baby boomers retiring and hence tend to consume less fuel, a trend in teenagers waiting until they are 18 to get drivers licenses AND they tend to drive less relative to teenagers in the past.

I want to include the idleness created by the recession as a reason for a decrease in consumption, which is certainly part of the equation, but that does not explain the projection that consumption will stay level for some time to come.  Surely the economy will recover and fuel consumption  will increase on a per person basis.

How would YOU explain the long(er) term trend in less consumption of various fuels ? (for planes, trains and automobiles et al)

Source: Fiscal Times

Nice chart showing gas taxes in various "rich" countries and an excellent graph showing the effect of these taxes on the quantity demanded for gasoline. Bet you can guess what the answer is.

One of the primary reasons for the differences in the retail price of gasoline in the "rich world" is the differences in the gas/fuel tax levied on each gallon of gasoline.

This first graph shows, in US dollars, the amount of tax various countries levy on gasoline and diesel fuels.  Quite a difference!

Source: Econbrowser

Here is a chart from a different source showing the pre and post tax price of gas and diesel in the coutries listed above and some others.  The blue line is pre-tax. You can see the price of fuel is basically the same in all areas

Source: HERE

The post-tax retail price of gasoline is going to be higher when the above taxes are added to the pre-tax price of gasoline, to state the obvious.

The Law of Demand in economics states that the price and quantity demanded of a good are INVERSELY related---price increases the quantity demanded decreases---price decreases the quantity demanded increases.  Makes sense, right?

The next graph illustrates this point explicitly.  Note the price on this graph is along the horizontal axis and the quantity demanded of fuel is on the vertical. This is the OPPOSITE of what is traditionally done in economics textbooks.  The inverse relationship between price and quantity demanded holds up rather well.

Source: Econbrowser

What are the implications?  If you want to seriously decrease the consumption of carbon-based fuels, the most effective way is through an increase in gas prices at the retail level.  Is this politically possible? Absolutely not.

To read more about this important topic go HERE for the source for this posting and/or go HERE for the original research paper that has more in detail. Worth a look if you are at all interested.

US becomes a Net Exporter of Petroleum products for the first time in 62 years!! Is this a good thing? Nice new graphic showing the cause...

This caught me by surprise. The US, for the first time in 62 years, has become a net EXPORTER of petroleum and petroleum based products.  Gasoline and diesel fuels (for cars and trucks) lead the way.
 
The following graph may help explain some of the reason.  It shows a leveling-off of gasoline supplied in the US starting in about 2005 and then declined in 2007-08 (recession started).

Source: EIA

However, this does not mean that  the production of gasoline has decreased.  While demand is soft in the US, many other economys in the world are growing and have an increased demand for gasoline.  This graph shows the production of gasoline. 

Notice how production varies in the short term, but if I am reading the trend line correctly, it has increased in the past year.  Use your imagination and put these three graphics together---A declining supply of gasoline in the US market, an increasing supply of gasoline produced in the US = export of the difference---its gotta go somewhere...

From the WSJ:

""U.S. customers have been pulling back in part because an anemic economic recovery has left millions still looking for work. In August, U.S. drivers burned 7.7% less gasoline than four years earlier, when gasoline usage peaked...

But U.S. drivers aren't seeing much benefit in the form of lower prices because refineries on the Gulf Coast are shipping much of their output to places where demand is strong, keeping prices high....

Mexico and Brazil were major consumers of U.S. exports, according to the September data, while the Netherlands—home to key European ports —and Singapore also were significant net importers.

Argentina and Peru are now net importers from the U.S. For the next year or two, "the economies in Latin America will be growing faster than in the U.S. and the trend of increasing exports should continue," says Daniel Vizel, U.S. head of oil trading for Macquarie Group Ltd.

Singapore's net imports from the U.S. roughly quadrupled in the past five years, while Mexico's rose by about two-thirds. Mexico, in particular, is having trouble keeping pace with gasoline demand and buys about 60% of gasoline exports from the U.S...;""

Nice chart showing the difference in gasoline prices between the US and Europe...Why the big difference???

Here is a chart showing the differences in the price of gasoline between the US and Europe at-large.  Why is there such a large disparity between the two continents?

Source: Business Insider

Much of the difference comes from the level of taxation on gasoline. Here are a few examples of countries shown above and the dollar amount in taxes levied on a gallon of gasoline.

Belgium $4.26

France $4.12

Germany $4.37

Italy $3.95

Japan $2.81

Netherlands $4.79

United Kingdom $4.47

United States $.39 

Nice graphic showing Americans are driving fewer miles... In general this is good, but maybe it is for the wrong reasons..

Number of the Week: Cutting Back On Driving

4.6 Billion: How many fewer miles traveled by drivers on U.S. roads in August than a year earlier:

Source: WSJ

These two graphs/charts don't synch up exactly, but you can see the direct relationship between the demand for gasoline and the miles driven over time.  The independent variable of course is the price of gasoline.

It is generally accepted that consumer demand for gasoline is relatively inelastic. This means that the percentage change in demand for a good is LESS than the percentage change in price.  In other words, consumers do not dramatically change their quantity demanded for a good when the price of the good changes.

In the case of gasoline, this is especially true when the price increases.  There is no immediate subsitute for gasoline in the short run---gotta have what you gotta have to satisfy how you have organized your life, job or business around, well, getting around.

This article and graphs suggest that the demand for gasoline has become MORE elastic in the last few years.  In other words, relative to previous gas price hikes, the percentage change in quantity demand for gasoline now is greater relative to the percentage change in quantity demanded for gasoline in a previous time period.  People are quicker to change behavior or have developed coping mechanisms the serve as subsitutes for consuming more gasoline:

""When gasoline prices started shooting higher earlier this year, U.S. drivers throttled back much more quickly than they used to in response to price increases. One reason why might be that the 2008 energy price shock is a recent enough memory that it’s easy for people to conserve. They still have the phone numbers of their old carpool buddies handy, and they know where the bus stop is. What’s more, with so many scarred by the recession and scared by the jobless rate, people seem quicker to cut back in response to price increases not just at the gas pump, but of any kind.""

It is certainly desirable for the country as a whole to consume less gasoline (hence oil) and drive fewer miles. However, the best way to achieve that is not through recession and economic hard times.  Improved transportation infrastucture, fuel effeciencies, and better consumer decision making would be far more preferrable.

Gas prices are too low and need to be higher! Our kids, grand-kids and great-grand kids will THANK US!

I am convinced the only way get off our dependence on oil (domestic and foreign) is to ensure the price of gasoline stays elevated.  A gas tax or a tax on a barrel of oil seems to be the preference of many/most economists.  $4.00 per gallon seems to be the generally accepted price that moves Americans to change their consumption behavior. It is a short term pain we must go through to obtain the long-term benefits.  Please read this short piece below.  I added emphasis on the parts I think are important.  You will see when the prices are high people start to make alternative choices in the types of vehicles they purchase.  The process works, it just has to be allowed to work itself through to the end.  The current policy to use the Strategic Oil Reserve only serves to slow down the process and sends mixed signals to the people. I am not insensitive to the hardships the high price of gas puts on people. I am MORE sensitive, however, to the hardships the will be visited upon the next generation if we don't take REAL action today. Is that so wrong? 

This is also a great read for AP Microeconomic teachers and students. Data is provided to calculate various elasticities...
Via Mark Thoma

From MIT Sloan Experts: My latest research* looks at how consumers adjust to high gas prices by changing the kinds of car they buy, and the prices they pay. What launched this research was the debate around the effectiveness of a gas tax to reduce climate change; the goal was to determine whether consumers undervalue fuel economy. If consumers do undervalue fuel economy, then such a tax would not shift enough consumers to buy smaller, more fuel-efficient automobiles.

I try to do my research with an eye toward showing policymakers what will happen if they adopt Policy X over Policy Y. I am not a granola environmentalist, but I do see a lot of inefficient policies out there, and as an economist that’s frustrating.

And here’s the thing…

At the moment, the US relies on a variety of subsidies and “performance standards” to reduce greenhouse gas emissions from the transportation sector. On the fuel side, we have ethanol subsidies and the Renewable Fuel Standard, which is an implicit subsidy program. On the vehicle side, we have Corporate Average Fuel Economy Standards, or CAFE standards, which dictate the average fuel economy of an automaker’s annual fleet. The current standard for passenger cars is 30.2 mpg. The standard for light-trucks — a classification that also includes SUVs under 8,500 pounds — is 24.1.

On the electricity side, lawmakers also use the Energy Star program, which was created in the early 1990s, to force appliance makers to create more efficient products. Policymakers seem to believe that consumers are not going to buy the correct dishwasher, or the correct air-conditioner. So instead, they regulate the manufacturer of these appliances to comply with certain efficiency requirements, rather than let the price of electricity reflect the social cost of that dishwasher or air-conditioner.

My research shows that performance standards – such as CAFE standards – may be more inefficient than previously thought, and that pricing instruments, such as a gas tax, would likely have a bigger impact on reducing greenhouse gas emissions.

My colleagues and I found that a jump in the price of gas causes a significant change in the kinds of cars that consumers buy and the price they pay for them. A $1 increase in the gasoline price changes the market shares of the most and least fuel-efficient new cars by +20% and -24%, respectively. Changes in gasoline prices also change the relative prices of the most fuel-efficient cars and the least fuel-efficient cars. For new cars, the relative price increase for fuel-efficient cars is $363 for a $1 increase in gas prices; for used cars it is $2839. (For comparison: a $1 increase in gas prices alters the budget of the average household by about $50 a month.)

I am not naïve, and I realize that no politician has ever been elected on a platform of: ‘I’m going to raise your gas prices,’ but by advocating alternatives, they’re promoting inefficient policies that simply hide these inflated costs. There’s a lot of resistance from consumers about the prospect of a gas or carbon tax, but I believe this is mainly because consumers are misled to believe that performance standards are cheaper.

The run-up in the price of gas in recent years has been substantial enough to make top auto executives give up their historic opposition to gasoline price taxes: some have even suggested that Congress should consider a variable gasoline tax that would create a $4 floor for retail gasoline prices.

Mike Jackson, CEO of AutoNation, the largest U.S. dealership chain, told the Wall Street Journal: “We need more expensive gasoline to change consumer behavior. Otherwise, Americans will continue to favor big vehicles, no matter what kind of fuel-economy standards the government imposes on automakers.”

Four dollars a gallon, he added, ‘is a good start.’ Hear, hear.

Graphs to help explain the MAIN reasons we will have higher oil and gasoline prices well into the future...





Gas taxes levied by various European countries compared to the US. YIKES!!

Below, in dollars, are the amounts levied on a gallon of gasoline in various European countries. The US by far has the smallest level of taxation...This is why the price of gas in Europe is more expensive, not because the gasoline itself is more costly...The US figure is an average. The Federal gas tax is $.20 and each state adds their own amount. 

Belgium             $4.26

France               $4.12

Germany            $4.37

Italy                    $3.95 

Japan                  $2.81 

Netherlands         $4.79 

United Kingdom   $4.47 

United States        $.39 

Data from HERE (HT: Carpe Diem)

Is gasoline a substitute or a complement for motorized scooters? Whatever the relationship the demand for them is going through the roof!!

The recent spike in gas prices is benefiting the bicycle and motor-ized scooter industries: 

Bike, scooter sales pick up speed

""Sales of new bikes rose 9% in the first quarter of this year, compared with the same period in 2010, and sales of road bikes — commonly used in commuting — jumped 29%, says Scott Jaeger, senior retail analyst with Leisure Trends Group, a Boulder, Colo.-based retail tracking firm. Sales of gas-powered scooters are up even more: nearly 50% in the first quarter compared with a year ago, says the Motorcycle Industry Council, a trade group. "We see spikes when fuel prices rise," says Ty van Hooydonk, the group's spokesman, noting many scooters average 60 to 80 miles per gallon.  When gas prices last peaked in the summer of 2008, Census data show bike commuting rose 15% nationwide from 2007.""

 Normally we think of gasoline as a complementary good, one that is used with another good such as cars. In this case, as cited in the article gasoline, bicycles and scooters are substitute goods. In economics we define goods as substitutes if the increase in the price of one good increases the demand for another good OR the decrease in the price of one good decreases demand for another good.  The relationship between price and quantity demanded is DIRECT in the case of substitute goods.


The increase in gas prices is increasing the demand for bicycles and gas powered scooters. It is very easy to see that a bicycle is a substitute for gasoline because they are not used together. But it is more difficult to see how a motorized scooter, which uses gasoline is a substitute for, well, gasoline.

I think the easiest way to understand this is to establish the "strength of the connection" between the two goods. Although I use gas in my scooter I am trying to GET AWAY from the high price of gasoline by substituting to a good that will allow me to consume as little gasoline as possible. If gas prices decreased and the demand for, say,  gas-guzzling SUV's increased, then consumers are RUNNING TOWARDS  more gasoline consumption---gasoline and SUV's are Complementary goods--the decrease in the price of gasoline increases the demand for SUV's.  Complements have an INVERSE relationship between price and demand.   

We can extend this to hybrid and other fuel efficient vehicles.  Gas prices increase and the  demand for these categories of cars increases. This meets the definition of Substitute goods.  Gas prices increase and the demand for SUV's deceases. This meets the definition for the goods to be Complements. 

On the AP Microeconomics test, they usually don't divide the line this thin. However, it will be in your interest to deepen your understanding of the differences between Substitutes and Complements.

No good deed goes unpunished...States want to tax electric cars because, well, they don't consume enough gas...Go figure...

States are experiencing declining revenues from gas taxes that are assessed on each gallon of gas.  More fuel efficient cars= less gas consumed over time=less tax revenue collected. The reasoning is these cars still impose wear and tear on the roads and are not contributing their "fair share"(there is that phrase again) in order to maintain road infrastructure.  What do you think? Fair/Not Fair?   

Wash. considers annual flat fee for electric cars

""Drivers of electric cars may have left the gas pump behind, but there's one expense they may not be able to shake: paying to maintain the roads.

After years of urging residents to buy fuel-efficient cars and giving them tax breaks to do it, Washington state lawmakers are considering a measure to charge them a $100 annual fee — what would be the nation's first electric car fee.

State lawmakers grappling with a $5 billion deficit are facing declining gas tax revenue, which means less money to maintain or improve roads.

"Electric vehicles put just as much wear and tear on our roads as gas vehicles," said Democratic state Sen. Mary Margaret Haugen, the bill's lead sponsor. "This simply ensures that they contribute their fair share to the upkeep of our roads."

Gas prices getting you down? It could be worse---imagine filling your Hummer in Paris or Rome. And I don't mean those cities in Texas...

US gasoline prices relative to European gasoline prices.  Big difference, eh?  What accounts for a majority of the difference? Gas taxes across Europe are MUCH higher than the US. In Texas the state tax per gallon a is $.20 and the Federal tax per gallon  is $.194 (19.4 cents) for a total of $.39.4 cents assessed on each gallon you purchase.  Gas taxes in Europe range between $5.00 and $7.00.  The ACTUAL price per gallon is about the same, but taxes create the chasm.  Why do European countries assess such high taxes on gasoline?  Extra credit on the next test for good responses...


Source HERE

trgwertger