Gasoline Prices about to Peak—Just Six Weeks Later than the Experts Predicted

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A little over a month ago, I wrote a column looking at the annual spring increase in gasoline prices. For that column, I interviewed six leading gasoline experts including Trilby Lundberg (Lundberg Survey), Jim Ritterbusch (Ritterbusch and Associates) Mark Routt (Energy Security Analysis Inc.), and Tim Evans (Citigroup Futures Research) about why this happens. Everyone of them agreed that EPA regulations requiring an almost automatic switchover from winter to summer gasoline blends creates a yearly crunch at the refineries that temporarily drive up prices.

All right, fair enough. But then at the end of the column I reported:

What's the bottom line for this year? All the analysts basically agreed that gasoline prices are probably close to their peak for the year and that they will fall soon. Prices may rise again toward the end of the summer, but unless all hell breaks loose-say a war with Iran or gigantic hurricanes assaulting the Gulf coast-gas prices should not exceed $2.75 this year.

$2.75? Ha! The Lundberg Survey is reporting that the average price for a gallon of gasoline is now at a record $3.07.

But are prices at really at record highs? Perhaps not. An analysis from the Cato Institute suggests that when one takes into account inflation and increases in disposable income gasoline is still a bargain compared to the bad old days.

In any case, the Senate is considering a bill that would raise corporate average fuel efficiency standards (CAFE) to 35 miles per gallon by 2020. But there is a much simpler way to encourage energy conservation. As I have previously pointed out:

If our Congressional overlords and environmental activists really think we should drive less and buy more efficient automobiles, then they should ditch the CAFE shell game and have the courage to recommend taxing gasoline at $5 per gallon.

For what it's worth, experts like Ritterbusch, Evans, and Routt apparently think that gas prices are about to peak now. Of course, that's what they told me six weeks ago.

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  1. Increases in disposable income?

    Does CATO use that metric when they look at the tax burden, too?

  2. Raising CAFE standards has the advantage over a carbon tax/gas tax in that it gives people and corporations a period of time to ramp up for the change, rather than producing a big shock. This saves some of the pain, and allows shifts in research priorities to fill some of the gap.

    It’s also less regressive, as poorer people tend not to buy new cars.

  3. joe,

    Does CATO use that metric when they look at the tax burden, too?

    1. CATO isnt some monolithical organization, so I bet different researchers use all kinds of different metrics

    2. I dont know

    3. Wouldnt it be silly? Send this article defines disposable income as (income – taxes) it would be silly to use a post tax denominator. taxas/income makes sense. gas/income or gas/(income-taxes) also both make sense. taxes/(income-taxes) doesnt make sense. Heck, that would give a negative tax rate if taxes were greater than income, which would sound good but would really be bad.

    After writing above, and playing with some numbers, I realize if taxes/income is constant than taxes(income-taxes) is also constant. So a change in rate in one place shows a similar change in rate in another, so it wouldnt have the effect that you were thinking it has anyway.

  4. When supply is running full out, the price is set by the consumers, not the producers. It rises to whatever level is necessary to get them to drive less, so as to match the supply.

    No future gasoline is burned. Only existing gasoline.

  5. joe: you can “ramp up” carbon taxes too.

  6. “An analysis from the Cato Institute suggests that when one takes into account inflation and increases in disposable income gasoline is still a bargain compared to the bad old days.”

    Not by much. From what I saw this morning we are only about $0.06 away.

    Anyway, the folks who scream about “global warming/high gas prices” probably are having a hard time talking out of both sides of their ass.

  7. “joe: you can “ramp up” carbon taxes too.”:

    True enough.

  8. If George Bush decided that you couldn’t buy the car you want because of “security concerns”, you people would have the vapors. The government can do the same thing through CAFE standards and that is somehow okay?

    You can make the argument that there are externalities in pollution and CO2 emmissions in driving a large car. Fine, then solve those externalities through taxing gas or the size of vehicles. That is not what CAFE does. CAFE says that you cannot trade efficiency for other values like safety or comfort no matter how much money you want to spend. It is a direct restriction on your freedom. How any self proclaimed “libertarian” can support such totalitarian policies is beyond me.

  9. How any self proclaimed “libertarian” can support such totalitarian policies is beyond me.

    When you find one that does, let me know.

  10. MP,

    Give the thread a bit and I am sure you will plenty of examples.

  11. I don’t know about disposable income, but $3.07 is the same price per gallon as the inflation-adjusted price in 1981. Even if due to shortages in refinery capacity, it seems notable.

  12. Wanna see a gas shortage?? Show me the way to the storage tanks.

  13. What strikes me about this article is how it says that $3.07 is a record for gas prices. Not so for us up here in Upstate, NY. Somehow our gas is right there at the national average, when sometime over the past couple of years I remember seeing it be in the $3.30’s and higher. You all in the cheaper gas states can whine yourselves away, but we consider this “not yet time to panic.”

  14. It’s peak oil, I tell ‘ya….PEAK OIL!!!

  15. I was shocked and a little ticked off at this time last year, but being a good little capitalist I blamed the government for their share of the costs, accepted market and other forces for the rest of the run-up and got on with my life, despite mainstream media outlets telling me I should be outraged that The Oil Man was butt-fucking me again. Just this morning I paid $3.09 a gallon and yawned. Using a debit card makes it seem almost free anyway. But, for entertainment value, I’ll be sure to check out Katie Couric and company’s over-the-top reports of consumer outrage. Sometimes I wonder if network anchors aren’t just a wee bit retarded. The end.

  16. In any case, the Senate is considering a bill that would raise corporate average fuel efficiency standards (CAFE) to 35 miles per gallon by 2020.

    Last time I checked mileage on my VW TDI New Beetle, I was up to 47 mpg.

    But yeah, the government should raise the standards to placate the SUV-driving bobos complaining about prices.

  17. Hey Trashy, tell us how you set your bed on fire!

  18. Interesting Reason_ing:
    () Experts give a reasonable explanation for gas price fluctuation in the spring.
    () They got the maximum price wrong!
    () They are idiots.
    () Let’s tax gas at $5/gallon. That will move all those drivers back to a quiet, environment preserving village existence. It is so much better for the Govt to do to us on purpose what pricing changes do to us on occasion.
    () Even better, declare that the average vehicle should get 35 mi/gal. Tax them if they don’t do it.
    () My suggestion is 80 mi/gal. If you are going to pick numbers out of the air, then at least pick one we can be proud of. Also, this will yield much more taxes, to be used for the benefit of us all.

  19. Of course there is this little thing call infaltion. What would a dollar in 1980 be worth today? Absolute numbers really mean nothing without considering inflation.

    There are lots of high milage cheap to drive eco penalty box cars to be had. If gases prices get high enough, those cars will become popular. People will adjust their behavior. If they don’t then that means they have the money and don’t give a shit. Either way, I fail to see why the government should have its panties in a whad over gas prices. Even if they are that concerned, just lower gas taxes, that should take away some of the shock to the economy.

  20. Frank G: I did not call them idiots. This is more a cautionary tale about the limits of expertise.

    I tacked on the gas tax discussion because I think it’s superior to Congress specifying the technical details of how cars are put together. Give consumers and engineers a price incentive and they’ll figure it out.

    In addition, I would like to associate myself with John’s trenchant observations.

  21. If our Congressional overlords and environmental activists really think we should drive less and buy more efficient automobiles, then they should ditch the CAFE shell game and have the courage to recommend taxing gasoline at $5 per gallon.

    OK, who are the leisure drivers here? C’mon, raise your hands….don’t be shy.

    Both ideas suck, Ron. CAFE only makes it appropriate in the future for the boot of the Feds to deign the “correct” gas mileage and gas taxes just punish everyone and create a congresscritter’s wet dream of a tax kitty to loot.

    CAFE wouldn’t have moved my decision about what car to buy and I don’t really drive any more than I have to as it is. I drive to work (I need my car at work and mass transit not only takes longer, but also costs more) and errands on the weekends. That’s about it.

    So how am I going to drive less? I won’t sentence my family to a certain death in an accident by sticking them in a Prius or other sub-compact and mass transit doesn’t work for me.

  22. edit: change “appropriate” to “acceptable”

  23. the Senate is considering a bill that would raise corporate average fuel efficiency

    Huh. Congress manufactures cars now?
    I can hardly wait for the new model.
    But what will they call it?

  24. Another way that CAFE standards are pragmatically worse than a straightforward gas tax is that the former punishes those who don’t drive much — exactly who you are trying to reward. Think little old lady who only drives on Sunday and wants to do so in a Buick.

  25. The Prius isn’t a subcompact. It isn’t even a compact.

    And it does pretty well on the safety tests.

  26. I wonder if anyone has ever thought about how the rise of the child safety seat has driven the desire for bigger cars. Ever try to get one of those things in and out of a small car like a Honda Civic? It sucks. Everyone I know drove a small car when they were single and first married only to buy something much larger once they had kids. Kids are small and a small car shouldn’t be a problem with them, until you factor in the safety seat.

  27. Well, let’s not have the present system, which is the worst of all worlds: horribly low standards, which when we try to raise the US auto industry whines incessantly about how this is “regulating them out of existance.”

    Of course, when we leave the market alone and the Japanese start eating Detroit’s lunch (partly because of the gas mileage on the cars), these very same seeming Free Marketers in Detroit scream they need protectionism and import quotas.

    What the US auto industry wants is a captive market where they can put out whatever junk they want and the US consumer just has to sit there and take it.

    Where’s my Smart Car, dammit?

  28. The problem Grumpy is that the CAFE standards really do kill Detroit unfairly. Detroit is actually responsive to customers and make big cars and trucks that people want. Thanks to the CAFE standards they can’t just concentrait on those types of models where they you know can actually make some money and instead have to produce high milage lines that get killed by imports just so they can meet the CAFE mandated “average fuel economy”. Why the hell is GM wasting anytime making small cars when the only cars they make that people want are big cars, pickups and SUVs? Because of CAFE standards that is why.

  29. The Prius isn’t a subcompact. It isn’t even a compact.

    The original Prius is.

    BTW, I get about 45 winter/52 summer with my original Prius (which is roughly what the estimnates were, though they were touted as 45 highway/52 city). I don’t know anyone with the newer Prius that is reaching the mpg on the estimates for that model.

  30. Well, let’s not have the present system, which is the worst of all worlds: horribly low standards, which when we try to raise the US auto industry whines incessantly about how this is “regulating them out of existance.”

    They’re doing a fine job of that without the help of the federal government.

    And we all know who’ll they’ll ultimately turn to when they can’t cook the books enough.

  31. John,
    If you buy an SUV for safety you’re dumb. According to the Insurance Institute of Highway Safety, your fatality rate in an accident in a SUV is the same as in small cars and higher than in medium or large cars. Plus your accident rate is higher due to being less maneuverable.

    I gotta agree with joe on this one. Taking inflation into account is pretty standard, but using disposable income is a pretty transparent way to lean on the scale.

  32. John, I’m fairly sure that, for instance, Chevy’s Tahoe or pickups or Ford’s Expedition or Excursion count against their CAFE averages.

  33. Oops, revise my last.

    “don’t count against their CAFE averages”

  34. If I have to choose, I think raising the cost per mile of burning gas makes more sense than mandating lower cost per mile. I don’t think the incentives line up very well on the latter concept.

  35. They didn’t for a while but I thought they killed the SUV loophole to the CAFE? Cars like the Mustang certainly do. Detroit for whatever reason does a better job of making larger less efficient cars. They shouldn’t be penalized by that through CAFE standards.

  36. JasonL,

    You are exactly right about the cost per mile. People make decisions at the margin. If you want people to consume less gas make the value obtained from burning a gallon of gas less. Mandtate 5mph CAFE and people would stop driving and gas consumption would drop.

  37. JasonL

    I think you have it right…it’s not about mpg…it’s a bout gallons burned.

    CAFE is jsut another unnecessarily complicated scheme built on a house of assumptions about how I choose to drive…and what.

  38. When economists do inflation-adjusted comparisons of the price of gasoline, why the heck don’t they use the pre-tax prices as comparisons? The states have gone crazy with gas-tax increases over the years, and there’s also a federal tax. Those taxes are per gallon and don’t fluctuate with the market price of oil.

    The car-seat point is interesting. On the one hand, the seats are cumbersome. On the other hand, average family size has declined over the last 50 years. My family used to tool around in a 1965 9-passenger Chevy Bel Aire wagon, and we needed every one of those seats. If the youngest kids had to have been jammed into carseats of the modern type we’d have had to take two vehicles, or buy a stretched wagon like airport shuttles used to use.

    In retrospect, the lousy gas mileage our old wagons used to get doesn’t seem so bad if it is represented as passenger-miles per gallon.

    Kevin

  39. Hey, all you free-market zealots…

    Down the street from my place, there’s a “76” across the street from a “Rotten Robbie’s”. RR consistently prices its gas lower than the 76; as much as ten cents per gallon lower at times. Doesn’t that mean that Rotten Robbie should never have any gas, and have gone out of business by now? After all, they’re selling below the market price!

    Anyway. No doubt this sudden spike in gas prices will result in large numbers of new refineries being built, which will lead to a massive oversupply, and next month gas will be $2.50 a gallon. Right? Isn’t that how the market is supposed to work?

  40. DensityDuck,

    Your questions are such amazing strawmen that I must assume you are some sort of anti-troll — that is, a friendly commenter who poses softball questions just so people responding to them look good.

  41. Carbon tax(charged to those who produce the CO2), accompanied with a tax rebate(divided equally), to make it revenue nuetral.

  42. It occurs to me that my response might have been mean and that DensityDuck might have been actual questions.

    So, just in case…

    1. The price of the reputation of the 76 compared to that of the Rotten Robbie across the street is as much as ten cents per gallon. If it were less, then the difference in price would be less. If it were more, then the difference in price would be more.

    2. Right now the hardest thing about building a new refinery is that no locality will allow it in their neighborhood. It’s hard to build new refineries when you can’t find a place to do so.

    As a result, more product must come from existing refineries, which pushes those harder and makes them more vulnerable to breakage and maintenance disruption.

  43. That $3.07 is an average. Out on the border between Oregon and Washington, I’ve watched prices go from $3.29 to $3.39 to $3.49 in a matter of weeks. In some cases, I’ve seen a 6 or 7 cent jump within two days of a previous jump. The jobs in this particular area tend to pay lower than the cities and we have to commute to work. I figure I now work one day out of my two week pay period just to buy gas. Good thing I don’t drive an SUV or big pickup.

  44. If our Congressional overlords and environmental activists really think we should drive less and buy more efficient automobiles, then they should ditch the CAFE shell game and have the courage to recommend taxing gasoline at $5 per gallon.

    I am taking that as a joke and guess that you agree with me that the best course is let fuel prices go where they may and when the price gets high enough ohter energy methods will be implimented by the market.

  45. “If you buy an SUV for safety you’re dumb. According to the Insurance Institute of Highway Safety, your fatality rate in an accident in a SUV is the same as in small cars and higher than in medium or large cars”

    Umm, no. I’m not sure what IIHS you’re talking about, but according to the Insurance Institute for Highway Safety, very large SUVs are the safest vehicles you can buy (at least for their occupants), and not by a narrow margin. Very large cars are the next safest, though as a group, SUVs are safer than any other class of vehicle, pickups the least (their stats don’t include motorcycles, so I’m not certain where they fit in). The death rate for small cars is nearly twice that for even small SUVs. Their stats can be found at this link: http://www.iihs.org/research/fatality_facts/occupants.html

    While I find unnecessarily gigantic vehicles every bit as annoying as you do, what’s dumb is accepting at face value anti-SUV propaganda spouted by some journalist too lazy to look at the actual stats.

    As to the CAFE/gas price issue…let’s impose a variable tax on imported oil that keeps it’s price at a minimum of $70/bbl. It will make lots of idle domestic production, and possibly some new innovations, economically viable. It would also probably cause the global price of oil to collapse. Yes, it will dent the economy, and oil companies will profit immensly. But whatever you think of Lee Raymond’s pay package, I’m pretty sure he’s not sending millions to Hamas or AQ. Obviously, this tax would have to rebated to citizens to eliminate any government incentive to stifle domestic production in an effort to generate revenue.

  46. Detroit is actually responsive to customers and make big cars and trucks that people want.

    Which must explain why Detroit’s sales have done so well lately.

  47. average price for a gallon of gasoline is now at a record $3.07.

    Where do these people live? (Yes, I know… average, but still, I gotta complain). I’d love to see the rock-bottom prices of $3 a gallon gas.

  48. “very large SUVs are the safest vehicles you can buy (at least for their occupants),”

    Without the benefit of actual research (’cause I’m too lazy and drunk to do it), is it possible that insurance companies are tabulating not only the risk to the occupants of SUVs, but also the damage they tend to inflict on the occupants of smaller vehicles they come in contact with (which doesn’t really address Mo’s assertion that you’re stupid to buy one, but instead argues for a certain amount of social Darwinian wisdom in choosing to do so) when they calculate the costs of these vehicles to their industry?

    Nit-picking aside, I’m not a fan of fuel taxes or CAF? standards. I believe that if fuel prices were allowed to find their natural level, that people would drive the market to adjust to that level. I don’t even have a problem with oil companies maximizing their profits when they think they can. But (correct me if I’m wrong here [again, too drunk to bother with research {other than researching the proper symbols for increasing levels of parenthetical asides}] ) I do have a problem with the tax funded subsidies that the quite profitable oil companies, and less profitable automobile companies, receive.

    While we’re (I’m) on the subject of undone research, can we look into the (anecdotal) evidence of a correlation between alcohol intake and parenthetical asides? I’m beginning to suspect that if I began to control the former, that I might be able to exert some control over the later.

  49. “[L]et’s impose a variable tax on imported oil that keeps it’s price at a minimum of $70/bbl.”

    You mean a tariff on imported oil? Like the one on imported ethanol? Those work so well to promote efficiency in the market.

  50. You need to separate safety from the passengers point of view and liability from the insurers point of view.

    One of the critical factors determining injuries in an accident is the mass of the vehicles. When a high-mass vehicle (like an SUV) hits a low-mass vehicle (like a compact car), the passengers in the SUV will have a very low likelyhood of injury while the passengers in the compact will have a very high likelyhood of death.

    From an owners point of view, SUVs are very safe. From an insurers point of veiw, SUVs are very dangerous.

  51. “One of the critical factors determining injuries in an accident is the mass of the vehicles”

    Actually, based on IIHS stats, that might be the most critical factor, though driver habits seem to play a huge role too, as demonstrated by the stats for pickup trucks and sports cars. In any case, my point was that if your primary concern is your own personal safety, it’s not “dumb” to by an SUV, and IIHS stats don’t say it is.

    “Those work so well to promote efficiency in the market”

    Sorry if you got the idea that was part of the equation – the main points of an import tax are to reduce the revenue going to people who don’t like us, get people to be more selective about when they drive, and make higher cost domestic production sources economical, which is by definition at odds with market efficiency – hence the “dent in the economy” remark. Such a proposal has multiple objectives and I suggest it as a “least bad” alternative, not a perfect one.

  52. SUVs are really safe…if you know how to drive them. Every year during the first week of winter I laugh at all the flipped-over SUVs littering our local highways left and right.

  53. Hey Grumpy! I’m with you on that Smart Car. I’d love to have one (but not at the price that the California importer is charging… at the price it would be if imported by MB).

    Yeah, I know it’s small, and may not pass US side impact regulations, so here’s a plan… let them import Smart Cars, and let customers license them, as motorcycles, instead of as cars. It is certainly safer in a side impact than a motorcycle. By licensing it as a motorcycle, I am accepting the risk that it is not as safe in a side impact crash… but again, safer than a motorcycle. (Not to mention, head ons… motorcycle versus Smart Car with airbags, et al. I’ll take the Smart.) And with the diesel model getting close to 75 miles per gallon, it’s perfect for my commute (17 miles round trip). Only two seats? That satisfies more than 90% of my transportation requirements; and I have something bigger for the other 10%. (Don’t mention that the HOV lanes, at least in Atlanta, allow motorcycles, even if they only have one person on them).

    Gimme one now! Heck, I’d even wear a helmet if I had to… (Bitching about the requirement to wear a helmet is for another thread.

    CB

  54. What has changed is the short price elasticity for gasoline. Back when, it was estimated to be -0.30; while today it’s been estimated to be -0.04.

    Consumers today appear to be less responsive to changes in gas price increases than before.

    There is also evidence suggesting that short run income elasticity from the late 70s and today is around 0.50. Fairly similar between the two periods of high gas prices.

    (from Hughes et al)

  55. VM:

    what?

    elasticity?

    whoa whoa whoa. don’t go introducing NEW numbers! that’s not praxeo-logical.

    reverend!

  56. 3/4 people want it their way.

  57. Color me confused here. How does one calculate the rate of inflation? Isn’t it based on something like “how much the cost of consumer staples have increased over time”? Accepting that we can argue about what is or isn’t a consumer staple, isn’t gasoline almost always on that list? Wouldn’t gas prices have to be fairly stable once you’ve accounted for inflation, since “adjusting for the changes in gas prices” is implicitly a part of “adjusting for inflation”?

    Something seems off about that. Hopefully, I’m just not understanding things.

  58. I predict $4 a gallon gas on or before Labor Day this year.

    NoStar_domus

  59. SUVs are really safe…if you know how to drive them. Every year during the first week of winter I laugh at all the flipped-over SUVs littering our local highways left and right.

    I keep hearing that but rarely see it even here in the DC area where damn near nobody knows how to do anything mechanical and many drive huge SUVs.

    Not that I wish to see a lot of what you describe in real.

    Color me confused here. How does one calculate the rate of inflation? Isn’t it based on something like “how much the cost of consumer staples have increased over time”?

    Actually, real inflation is caused by an oversupply of money and all (or almost all) prices rise because of it.

    What you are seeing in fuel prices is price appreciation, caused by reduced supply (refineries shut down for maintenance) and increased demand (nobody caring much about the price, still driving recreationally).

    Some places of the country see this with housing, where people continue to bid up the prices of homes but the price of bread remains stable. Also, housing price depreciation happens too, even though fuel prices remain the same. The usual cause of housing price hyper-appreciation is government restricting property use for housing.

    For all of you “big oil conspiracy” folk out there, if that were true gasoline would be $14/gal. every day all of the time.

  60. Today here in Californistan, I paid $3.62 for Chevron’s Premium for my MINI Cooper S.

    I wonder what the price would be if fuel taxes actually covered the cost of maintaining California’s roads?

    …Without direct & indirect subsidies for the fuel compaines? (amounts to about $15b/y)

    …without CAFE and CARB? (who keep me from buying a MINI Cooper D[iesel]) :/

  61. The Prius isn’t a subcompact. It isn’t even a compact.

    And it does pretty well on the safety tests.

    Yes, for its class. A good result for a compact and a large car is not the same thing.

    I’ll put my large car up against your Prius in an accident any day of the week. In the end, physics and mass rules, or so says IIHS

  62. – So, just in case…

    1. The price of the reputation of the 76 compared to that of the Rotten Robbie across the street is as much as ten cents per gallon. If it were less, then the difference in price would be less. If it were more, then the difference in price would be more. –

    I have a different reason, and you see this everywhere. Up the road from me is a Sheetz next to a mobile. Sheetz is always 5-15 cents less per gallon. They simply price gas lower to get you in the lot where they have a huge store with a deli. The lower gas price makes you pull in. Then you pay an extra 10c for a coke. The mobile store is 1/4 the sheetz store with no deli. It’s just different business models, or as Duck would call it, rocket surgery.

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