Gas is too cheap; should there be a floor price under it?

local gas
CC BY 2.0 Kelly Rossiter/ Gas price in liters

If gas prices keep going down, Americans might well be paying per gallon what Canadians are paying per liter, prices that nobody has seen in decades. Now even conservative neoclassical economists are suggesting that it is too cheap, and that perhaps it is time for a price floor. Maximilian Auffhammer, a professor of international sustainable development at UC Berkeley, writes about the problem, and about how people are driving bigger cars over a road network that is falling apart.

My version of the idea goes like this: If the price of oil drops below a certain price, say $70 per barrel, gas prices get frozen at the average local historical price for $70 oil. Yes, we would keep gas prices artificially high. This would discourage consumers from driving more and maintain disincentives to purchase really fuel-inefficient cars

He would plow all of this money back into fixing the highway system and improving public transport. He notes that other countries are doing it:

You are shaking your head. Well, the Chinese are not. In the first week of January, the National Development and Reform Commission (which is China’s economic planning agency) announced that the price of diesel and gasoline would not be lowered as long as the price of oil is below $40.

gas prices© Gasbuddy

Some commenters on his site are outraged, claiming that "Supply and demand are the basic tenets of our economy." But others note that the SUVs are taking over the roads, that the US oil industry is losing a fortune (well, that is the point of this all, isn't it?).

Tags: Energy | Transportation

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