The Senate is currently debating energy policy legislation that
could result in significantly higher prices for gasoline consumers.
A review of S. 1419, including the just-completed section on tax
changes, reveals that the bill could increase the price of regular
unleaded gasoline from $3.14 per gallon (the early May national
average) to $6.40 in 2016--a 104 percent increase.
The Senate bill aims to slow and ultimately reverse the growth
of carbon emissions from gasoline-powered vehicles, mainly through
provisions requiring higher Corporate Average Fuel Economy (CAFE)
standards for cars and more biofuel content in retail gasoline. The
bill does not, however, contain significant funding or
organizational plans for increasing the country's supply of
petroleum. In addition, the bill contains a section directed at
"price gouging." The bill proposes paying for the new mandates and
programs with a series of tax increases, most of which would be
paid by producers of gasoline. The combined effects of these policy
changes would cause retail gasoline prices to increase.
Click on Image to View Estimated Gas Prices by State
Biofuel Content. The requirement to increase the biofuel
content of retail gasoline would reduce flexibility in the nation's
gasoline supply and add to the production costs--the latter
stemming primarily from the higher costs of producing ethanol. Both
trends would begin in the short term as the structure of gasoline
production changed to conform to the bill's requirements.
Increasing CAFE Standards. If the nation's automobile and
truck fleet achieves the higher fuel efficiency targets, demand for
gasoline will fall, exerting a downward pressure on gas prices.
However, that pressure offsets only about a fourth of the increased
costs resulting from biofuel requirements. Some analysts might
argue that the downward pressure will be greater; however, recent
history has demonstrated that higher fuel efficiency standards have
a modest effect on price.
Price Controls. The Senate's least environmental
initiative is the one most likely to increase prices. Many times
over the past 100 years, well-meaning efforts to cap prices in
order to protect U.S. consumers resulted in unintended reductions
in supply and higher prices. A simple economic truth is that high
prices spur producers to increase supply, which ultimately lowers
prices for consumers. When policymakers set price caps to combat
"price gouging," the result is the opposite of the one intended.
Consumers increase their demand as a result of the capped price,
but producers do not face any incentive to meet that demand. Supply
fails to keep pace with demand, resulting in rationing or supply
Increased Taxes. The Senate bill contains a number of tax
law changes that would also contribute to gasoline prices. Among
the most prominent are:
- a tax on finished gasoline as it leaves the production
- a tax on gasoline produced in the United States and sold
- a decrease in the tax credit offered to producers of ethanol;
- major changes in the tax credits and deductions afforded to
gasoline producers under current tax law.
The loss of current gasoline company tax credits is particularly
dangerous to consumers, since it is a large loss (about $13 billion
over 10 years). Taxpaying corporations tend to recoup increased tax
payments in the form of higher retail prices.
Taken together, the four factors will raise the price of
gasoline by the following estimated amounts:
The national average per gallon price of gasoline in May 2007
was $3.14. However, state-by-state monthly averages
are not available, so the data is based on the average state gas
price on May 15, 2007, which was $3.11. This average is the basis for
the national and state-by-state increases in pump prices over the
next several years. Heritage analysts projected estimates of
gasoline prices for 2008 by first adjusting the mid-May 2007 rate
for 1% inflation and then adding 28 cents to each state's
average cost. Similarly, state-level estimates for 2010 through
2016 were calculated by adding the projected cost of S. 1419 to
consumers to the previous year's inflation-adjusted pump prices.
Gas consumers can expect to pay between $3.16 and $3.79 a gallon
for gas in 2008 after adding in the estimated impact of the Senate
energy bill. By 2016, all states can expect gas prices in excess of
$6. As a result of S. 1419, consumers would spend an average of
$1445 more per year on gasoline in 2016 than in 2008.
Note: The Heritage Foundation's website has an interactive map that displays the
information from the above chart.
William W. Beach
is Director of, and Shanea Watkins, Ph.D., is Policy Analyst in
Empirical Studies in, the Center for Data Analysis at The Heritage
Since the calculations were based on mid-year prices, the
adjustment for inflation was discounted to 1 percent, as opposed to
a 2 percent inflation adjustment. Gas prices in 2010, 2012, 2014
and 2016 were adjusted for 4 percent inflation (2 percent inflation
over 2 years = 4 percent inflation adjustment).
This is the estimated impact that S. 1419 would have on regular
unleaded gasoline prices, as shown in Table 1.