December 10, 2007
By William W. Beach and Shanea Watkins, Ph.D.
Congress is currently debating energy policy legislation that
could result in significantly higher prices for gasoline consumers.
A review of H.R. 6, including the just-completed section on tax
changes, reveals that the bill could increase the price of regular
unleaded gasoline from $3.06 per gallon (the early December
national average) to $5.02 in 2016.
The bill aims to slow and ultimately reverse the growth of
carbon emissions from many sources, among them gasoline-powered
vehicles. It does so mainly through provisions requiring higher
Corporate Average Fuel Economy (CAFE) standards for cars and more
biofuel content in retail gasoline. All of the federal government
spending associated with the bill's mandates and programs is paid
for through a series of tax increases, most of which fall on the
producers of gasoline. The combined effects of these policy changes
will cause retail gasoline prices to increase.
Biofuel Content. The requirement to increase the biofuel
content of retail gasoline reduces flexibility in the nation's
gasoline supply and adds to the production costs--the latter
stemming primarily from the higher costs of producing ethanol and
cellulosic alcohol. Taken together, these two factors will
affect gas prices in the short term as the structure of gasoline
production changes 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 least environmentally focused
initiative associated with this energy legislation is the one most
likely to increase prices. Earlier this year, the House
adopted--and the Senate seriously considered--stand-alone
legislation to prevent "price gouging," or especially high prices
that a government agency would find well in excess of "market
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 "brown outs."
Increased Taxes. The bill contains a number of tax law
changes that will also affect gasoline prices. Among the most
prominent are the following:
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 early
December 2007 was $3.06. This average is the basis for the national
and state-by-state increases in the per-gallon cost of regular
unleaded gasoline prices over the next several years. Heritage
analysts projected estimates of gasoline prices through 2016 by
first adjusting the December 2007 rate for inflation and
then adding the calculated change in gas prices as a result of the
provisions in H.R. 6 to each state's average cost. Gas consumers
can expect to pay between $3.07 and $3.66 per gallon for gas in
2008 after adding in the estimated impact of the energy bill. By
2016, the average cost of gas per gallon nationally will be just
over $5. As a result, consumers will spend an average of $837 more
per year on gasoline in 2016 than in 2008.
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 Foundation.
more on the costs of ethanol and cellulosic alcohol production, see
Ben Lieberman, "The Compromise Energy Bill: Harmful Regulation, Not
Affordable Energy," Heritage Foundation WebMemo No. 1721,
December 5, 2007, at www.heritage.org/Research/EnergyandEnvironment/wm1721.cfm.
Several other revenue-raising provisions in the
legislation do not relate to oil companies or affect gasoline
prices. When these other tax increases are included, the total
amount raised over 10 years is $19.7 billion.
on average per-gallon cost of gas was collected on December 7 from
selecting each state and recording the value in the "Current Avg."
Average prices for December 2007 were carried
over to 2008 and were not adjusted for inflation. Gas prices in
2010, 2012, 2014, and 2016 were adjusted for 8.8 percent inflation
(4.4 percent inflation over 2 years = 8.8 percent inflation
adjustment). This rate was calculated based on the U.S. average
weekly price for unleaded from August 1990 through December 2007.
Weekly Retail Gasoline and Diesel Prices are available from the
Energy Information Administration at http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm.
is the estimated impact that the energy bill would have on regular
unleaded gasoline prices, as shown in Table 1.
H.R. 6 could increase the price of regular unleaded gasoline from$3.06 per gallon to $5.02 by 2016.
William W. Beach
Director, Center for Data Analysis and Lazof Family Fellow
Read More >>
Shanea Watkins, Ph.D.
Policy Analyst in Empirical Studies
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