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Gasoline is still cheap in the U.S., relatively speaking

Wednesday, May 28, 2008

You don't really appreciate just how cheap gasoline still is in the U.S. until you travel abroad. On our last trip to Europe in 2005, we filled up the ten-gallon tank on our rental car at a cost of about $80 - that seemed like lot back then and still does today.

Well, actually, the part about $8 a gallon still seems like a lot.

But, $80 a tank? That doesn't sound like such an outrageous amount anymore.

Of course, those visiting the U.S. today from Venezuela, Saudi Arabia, and elsewhere probably say the same thing about fuel prices in the U.S., so, it's all relative.

This report in today's Wall Street Journal has a nice summary of fuel prices in the U.S. and in Europe. For some reason, the graphic you see below appears only in the print edition.
With a little video clip about angry truck drivers in the U.K. (where the news always sounds a bit different when delivered with a British accent) the report explains:

With gasoline costing upward of $9 a gallon in parts of Europe, protests are putting governments under pressure to cut the taxes that make up much of the price of fuel.

Hundreds of truck drivers converged on London Tuesday, jamming a major road and forcing police to divert motorists. In France, fishermen continued to block ports and oil depots, while their counterparts in Spain and Italy signaled they would join the protest. French President Nicolas Sarkozy responded by calling for a Europe-wide cap on fuel sales tax.

So far, however, the real puzzle is that the soaring fuel costs -- which make U.S. pump prices look cheap by comparison -- haven't caught fire as a major political issue in Europe. The reasons for that, analysts say, range from simple fatalism to a growing green consciousness that makes some Europeans feel they should be cutting back on car travel anyhow.
In much of Europe, taxes account for more than half of the retail price of gasoline and diesel, hence the modest increases in price as shown above which would be even less in local currency terms. That probably helps to explain why it's not as big an issue as in the U.S.

This is one case where high taxes have caused businesses and consumers to change their behavior for the better (unless of course you believe that the current recent era of cheap energy will last forever).

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Anonymous said...

Then if you add in the drop of the usa dollar of around 13% in the last year to the Euro, the rise in fuel costs for France and Germany is even less for those folks. Also since their cars get so much better MPG or as they put it L/100KM, they are paying less then the USA in fuel costs per mile to drive, but dont have to drive at all because they have light rail!

Anonymous said...

Further to Anon's note

Impossible that prices in France and Germany only went up by 8% or 4% - even with the lousy WSJ conversion of last year's prices at this year's Euro/$ rate - I'm not a good enough math person (or patient enough) to get the spreadsheet right, but I'm willing to bet that someone who did it would be laughing themselves silly at the WSJ


The Inscrutable Chicken said...

anonymous 1 hit the nail on the head.

Higher gas prices don't hurt if you don't use much of it - either because of more fuel efficient cars, shorter traveling distances, or availability of alternatives (public transport or bicycles in Amsterdam).

I think the way to look at the relative pain of higher gas prices is the share of disposable income method. I don’t know whether the following statistics are readily available so I’ve used estimates to illustrate. If I’m wildly out then the conclusion may change but hopefully I’m in the ballpark.

15,000 (Average consumer miles pa) / 15 (average mpg) = 1,000 gallons pa
x $3.72 = $3,720 pa.
$50,000 – 25% average tax = $37,500
So Americans spend about 10% of disposable income on gas.

12,000 miles / 20 mpg = 600 gallons pa
x 8.42 = $5,052 pa.
£31,000 x 1.97 = $61,000 pa – 25% tax = $45,750
So Brits spend about 11% of disposable income on gas.

So even though we pay twice as much as you for gas, the “relative pain” is about the same. The figures can be further influenced by differences in other major factors such as proportion of income spent on housing and overall savings rates.

Of course, this analysis doesn’t take into account the impact of rising gas prices as an input cost into other goods and services but my conclusion is that UK/Europe shouldn’t automatically look across the Atlantic and say “stop whining about gas prices” but rather should say “live closer to work/friends and drive smaller cars and you’ll have it good again”.

RebbePete said...

A big problem is that the US has built our whole society around cheap energy. Work tends to be centralized in certain geographic areas that are far away from places where people live. Rather than the European model of smaller, more self-sufficient towns, the US over the last 50 years has adopted the mega-city/suburbs model.

I believe that, over the next few decades, we'll be returning to the self-sufficient town model, i.e., where industry, agriculture and commerce are local and we move away from the big-box retailers carting goods halfway across the world.

It's actually going to be, IMHO, a much more pleasant US to live in eventually, but the transition will be painful.

- Pete

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