Sunday, December 30, 2007

Gas is cheap

When someone rolls up to the gas pump next to you in a behemoth that's a black hole for fossil fuels, at least you have the satisfaction that at least they're having to pay a lot more than you for fuel.

Not really.

You're actually subsidizing that driver's gas guzzling life in paradise. And under the most aggressive scenarios, you and fellow drivers are paying more for that gas than they are.

An International Center for Technology Assessment study suggests that immense government subsidies for fossil fuels mean American consumers pay much of the cost of their gasoline through taxes rather than their gas company credit cards.

And that means that even if you're working hard to conserve, you're paying disproportionately for those who overconsume.

The status of the “real” price of gas is of interest in the face of new federal energy legislation, which the federal government had to water down to get through Congress and to gain a Presidential signature. Does it finally level the playing field with respect to the true costs of fossil fuels versus alternatives?

The House version would have added taxes that might balance some of the tax-breaks and subsidies to the oil companies, but the taxes were dropped in the face of Senate opposition.

We weren't able to find a current study of the true cost of gas, so the up-to-date numbers may be somewhat different than the ones we found, but they're a nice example.

The International Center for Technology Assessment, in “The Real Price of Gasoline,” a study that's now nearly a decade old but was updated in 2005, found that government has established a multi-tiered subsidy program that reduces significantly the price consumers pay at the pump for gasoline.

That doesn't mean you're not paying the full price, just that the sucking sound comes from costs beyond the pump—like when you're paying your taxes.

(See the 1998 study and the 2005 update under publications at

Among the study's listed subsidies to oil companies are the percentage depletion allowance, nonconventional fuel production credit, immediate expensing of exploration and development costs, enhanced oil recovery credit, foreign tax credits, foreign income deferral, accelerated depreciation allowances, and more, They add up to billions upon billions of bucks.

The report says that since most states base their taxation on federal calculations, those benefits also apply when the fuel firms calculate their state income taxes.

“Provisions in the tax code reflect unparalleled government support of the oil industry and significantly distort...the real price of gasoline,” the report says.

Still, all those subsidies only amount to a few pennies per gallon.

The report says the bigger subsidy is in the government's support of highways, waterways and harbors to promote the transport and use of petroleum fuels, government costs of oil spill cleanup, government sale of oil leases at cheap prices, the government and public costs associated with air pollution caused by the burning of the fuels, the costs of dealing with climate change and so forth. It goes on and on.

If you toss in all the subsidies and costs—and admittedly, you could make a strong argument for not including at least some of those costs—it adds up to hundreds of billions of dollars. And if those costs were included at the pump, a gallon of gas—in 1998—would have cost from a low of $5.60 to a high of $15.14 per gallon. The 2005 update, which adds the costs of the Iraq war and others, adds 20 or 30 cents to that.

The difference between the actual and unsubsidized price represents the indirect tax consumers pay for fuel. You also pay direct taxes at the pump. The American Petroleum Institute in a July 2007 report says the national average tax on fuel is 46.9 cents a gallon. API listed Hawaii as sixth highest in the nation at 51 cents a gallon. (See data on fuel taxes and other issues at the API website,

Understandably, the petroleum industry argues that it's paying plenty of taxes and it argues against changing the playing field.

Says a statement on its website:

“In 2004, America's major oil and natural gas companies paid an estimated $48.36 billion in income tax. In addition, these companies collected over $45 billion in excise taxes in 2004 on behalf of the IRS. Additional taxes and fees imposed on the industry include gross production or severance taxes, import duties, and property, sales, and use taxes. U.S.-based petroleum companies must compete in the global oil and gas market to ensure a stable supply here at home. Taxes can affect our companies' ability to stay competitive in the world market.”

Does the artificial deflation of pump-paid fuel cost affect things like driving and automotive choices? What if you paid the real cost of fuel at the pump rather than paying it through income taxes and other costs? The international example suggests costs can drive changes in behavior.

Parts of Europe are familiar with gas in the $6-per-gallon range. In England last year, prices were closer to $7 a gallon.

One result? Europeans buy cars with nearly double the average fuel economy of those in the U.S. The average fuel economy in Europe is more than 40 miles a gallon, while ours is in the 20s.

Even the new federal energy bill will only push U.S. fuel economy up into the 30s by 2020.

The next time you suffer sticker shock when you see the price of gas at the pump, take a deep breath. Chances are, that price is cheap compared with what you're actually paying.

© 2007 Jan W. TenBruggencate

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