Last Update: July 6, 2015

What is the true price of gasoline? Should it cost $10 per gallon?

Gasoline and Diesel Types of Crude Oil sources & constraints
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As of this writing the U.S.-wide price for gasoline is $3.50 per gallon, down a bit from late September 2012, but nearly reaching the most recent highest gasoline prices of $4.10 per gallon in July 2009. The question of "energy prices" and gasoline prices are weighing heavily on everyones mind, and was a prominent part of the election campaign cycle just ended. The campaign rhetoric circled around the price being too high, with Republican pundits calling for more oil drilling to reduce gasoline prices, and Obama and the Democrats calling for investments in renewable energy resources, in electric vehicles, and in higher fuel efficiency overall. There was little recognition of the real problem, the growing cost in extracting oil, and a lot of delusion about the actual oil reserves in the U.S. The Democrats did repeatedly raise the issue of subsidies for oil companies, but did not call out the real costs of our national dependency on Oil.

This is the price average for the whole U.S. (blue), New York City (red) and San Francisco (green). One thing to note is that while there was a large price increase for gasoline during the Obama Presidency (a point raised repeatedly by Republicans) this was immediately preceded by a huge fall in gasoline prices late in the Bush 43 Presidency. What happened? It was the economic crisis that hit the country in September 2008, nearly driving the country into a depression. There was a fall-off of economic activity, meaning less demand for Oil, and as the economy recovered the price of Oil went up and now it has nearly reached the level it was just before that crash. The price for oil and gasoline has hovered in this range since March 2011.

The correct price for gasoline and oil is a huge question with major political, economic and environmental consequences.

Some complain about the high price of gasoline and look to expanding oil drilling to bring the price down. Some see the subsidies given to oil companies, and wonder why this happens when the oil companies are immensely profitable. Some see the environmental cost for refining and burning oil, and to incentivize alternatives call for even higher gasoline prices. Some see the immense oil imports and the economic cost of selling dollars to buy oil, and also call for alternatives to oil. Some see the Middle East wars as being an externalized cost to the price of gasoline, see it as about gaining control over oil supplies, and also call for alternatives to oil.

Some countries who have different conditions and policies than the U.S. already pay $10 per gallon for gasoline.

Some say that if we remove artificial controls on the price of oil, such as government subsidies, the free market will set the price accordingly and the free market will automatically choose an alternative to oil.

Some say the gasoline price is too high and should be lowered

There is a strong correlation between high oil prices and recessions, and the recent bout of recession was immediately preceded by very high world-wide oil prices.

Does the government have much ability to control oil prices? Very little. There is the Strategic Petroleum Reserves, but it's purpose is not for the government to do market manipulation. Instead its purpose is to provide oil supplies in times of serious strategic need. Otherwise oil prices are set by a supposedly free market, though many dispute whether oil prices are a proper free market. For example, OPEC is a consortium which sets the price for oil rather than letting the market determine the price.

Some say "drill baby drill" and the price will fall

This is a common delusion in the U.S. and elsewhere, that we can "drill" for more oil and it will solve the problem of oil and gasoline prices. This is a major factor in the U.S. political debate, with "Oil Friendly" politicians calling for more oil drilling. Even President Obama, supposedly an anti-oil politician, seemed to be competing for the role of most-oil-friendly politician because of boasts of how much domestic oil production expanded during his Presidency.

The truth is that reserves of normal oil (conventional oil) have peaked world-wide and the U.S. has a tiny fraction of all conventional oil reserves. This means that normal oil production is inevitably declining, and the price for conventional oil is inevitably rising.

Where oil production has expanded is due to the use of hydraulic fracturing and other expensive energy intensive and environmentally bad techniques to convert heavy sticky thick stuff into usable oil. For example Alberta Canada has a huge deposit of "tar sands" which is sand that has hydrocarbons in it, and to convert that into usable oil means massive strip mining and massive amounts of energy to melt the tar into usable oil. It is a huge environmental disaster, plus extremely expensive.

Another symptom of oil decline is that the oil companies are having to go ever farther off-shore to find oil, and drill in ever deeper waters. This is extremely expensive, and as we saw with the Gulf Oil disaster in 2010 carries huge environmental risks and problems can take months to fix.

What about the oil company subsidies?

Is this the correct allocation of dollars, to subsidize an immensely profitable industry? Some say the oil company subsidies are one of many factors tilting the market to the oil companies benefit. During his State of the Union Address last week President Obama said "We've subsidized oil companies for a century. That's long enough. It's time to end the taxpayer giveaways to an industry that rarely has been more profitable, and double-down on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs."

There are problems with the use of oil, and high oil prices could disincentivize its use and incentivize alternatives

  • Economic damage to the U.S. coming from importing so much oil and shipping dollars to oil producing countries
  • U.S. is at risk to oil producing countries withholding oil, which would cause economic catastrophe as it did in the 1970's
  • A range of environmental, health and climate issues caused by the use of oil

Who pays for the externalities?

Some of the problems with the use of oil boil down to what Economists call Externalities.

An externality is a cost that's paid by someone else and is not covered by the cost of the product. For example, are the costs of poisoning the places near oil wells or oil refineries reflected in the pump price of gasoline? The health care costs of those unfortunate enough to live near where crude oil is mined or processed is not paid for by the oil companies, but by other means if at all.

The cost of the Iraq War can be seen as an externality to the price of gasoline, if you are one who believes the Iraq War was about gaining control of oil supplies. After all, waging war against Iraq to maintain control over oil supplies is an example of The Carter Doctrine in action.

Another example is the cost of environmental and climate damage due to the CO2 and other chemicals emitted into the environment from burning oil. In June 2009 Elon Musk (CEO of Tesla Motors) was quoted saying gasoline should be $10 per gallon because "I'm not paying for the true cost of gasoline at the pump...since nobody's explicitly paying for the CO2 capacity of the oceans and atmospheres, it's getting consumed. We will pay for it down the road, but we are sort of ignoring it for now."

Inherent unsustainability of U.S. model of cities and gasoline use

In the U.S. most cities are built on a "sprawl" model that encourages rampant gasoline use. We as a people have grown accustomed to routinely driving gasoline powered cars long distances. In some areas there are significant numbers of people with a 100 mile daily commute. We feel sorry for those people and the 2 hours a day they spend locked in their cars, plus we are collectively choking on the fumes of their flagrant use of gasoline.

A lifestyle of 100 mile commutes is unsustainable no mater what fuel is driving the vehicle.

Why? Is it a government deciding by fiat that it is unsustainable? What about the personal freedom to choose where to live and where to work and how far we drive each day?

Long commutes like this are unsustainable for technical reasons. The energy cost of a 100 mile drive with modern cars is enormous. The highway system required to support millions of drivers with long commutes makes for a land use nightmare, preventing vast swaths of land from being used for productive uses like housing, farming, factories, etc. That highway system is also ugly as all get out.

The structure of US cities we're saddled with is the result of government policies that manipulate the market. One of the roles of government is zoning policies, transportation policies, land use policies, etc. Zoning commissions around the country have mandated a geometry of suburbia that results in a population too low a density for mass transit to be functional.

An unfettered free market would do no better ... housing developers prove time after time, what they want is cheap land on which to build expensive houses. That's a recipe for sprawl because the cheap land is well away from town. That cheap land also means converting farm land into suburbia which means there's less land on which to grow food.

There is nothing free market about urban design. We mandate low density high energy demand suburbs in our zoning ordinances. Try to put in a house or mall without providing in adequate parking and see how far you go. Over 30 percent of Los Angeles land area is covered with roads for cars and parking for cars. This dissipates our cities and makes walking, bicycling, or public transport difficult. You can't get a permit approved without complying to this minimum standard on allocations to the automobile.

Gasoline Taxes & ending oil subsidies

There are huge problems from using Oil. There would be a positive benefit to society from a shift away from Fossil Oil to other fuels. The Fossil Oil Fuel industry has a huge cost advantage making it economically difficult for society to switch to alternatives. What would be the best way to incentivize a switch from fossil oil fuels to a proper alternative such as renewable electricity (wind, solar, etc)?

The government doesn't directly set the price for oil and gasoline, but the government does control two things:

  • The level of subsidy given to Oil companies (either direct subsidies or indirect)
  • The taxes on gasoline
First - end the subsidies to Oil companies, especially the indirect subsidies. What do I mean by "indirect subsidy"? Who is paying for all the externalities? There are clear connections between fossil oil consumption and a range of health issues, and those health issues are not being paid by the oil companies. Likewise the oil companies did not pay for the war in Iraq.

It is the direct subsidies to oil companies that was the subject of political debate. They should be ended as well.

Second - the gasoline tax in the U.S. has not been increased in decades. This can be fixed, with increases voted in by Congress etc and perhaps tie increases to the rate of inflation.

The role of government in coordinating oil consumption and oil price

If there is no sustainable approach to the allocation and availability of a finite resource then the depletion of that resource becomes uncontrolled and leads to a chaotic and disorderly outcome. Inevitably history demonstrates that leads to regional disparities and war.

Yes, governments aren't good at giving value for money that's true the world over. But some form of central responsible approach to managing oil (energy usage by taxation) is appropriate when there is no viable economic alternative and peak oil means that it is increasingly undervalued in the USA in particular.

Insufficient efficiency measures and powerful lobby groups supporting the individual beliefs in rights to low cost gasoline in the USA are outdated, irresponsible, parochial and detrimental to global interests.

The price for bottled water, or a Starbucks Latte

At the current time a bottle of tap water at the local 7-11, or a Starbucks Latte, costs more than gasoline.

Tens of millions visit their local coffee shop every day on their way to work and pay those kind of prices without batting an eye, yet complain about the price of a resource that is nothing short of a miracle. Fossil fuels are a miracle that has transformed our society and economy from an agricultural based economy moving goods by horse-drawn wagons to the nearest rail depot where a WOOD-FIRED train would move it to a WATER-POWERED MILL for processing.

This miracle came about because of a finite resource, fossil oil, being consumed by a rapidly increasing population.

It's understood that when this finite resource is half consumed, that the cost of extracting that resource will rise. This pattern has been observed all over the world and goes by the name 'Peak Oil'.

About the Author(s)

David Herron : David Herron is a writer and software engineer focusing on the wise use of technology. He is especially interested in clean energy technologies like solar power, wind power, and electric cars. David worked for nearly 30 years in Silicon Valley on software ranging from electronic mail systems, to video streaming, to the Java programming language, and has published several books on Node.js programming and electric vehicles.

What is the true price of gasoline? Should it cost $10 per gallon?

Gasoline and Diesel Types of Crude Oil sources & constraints
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