Do you think gas is expensive?

Do you think gas is expensive?

According to US Energy Information Administration (EIA) [1], the December 2009 Euro-27 zone retail prices for premium (95) gasoline were about $7/gallon compared to a slightly less than $3/gallon in the US. Interestingly enough, the diesel (=’automotive oil’) prices in the US were close to $3/gallon but on average about $6/gallon in Europe.

What stands behind the two differences? The main difference between the price in gasoline in the Eurozone and the USA has to do with policy, namely taxes. In the US, the December 2009 retail prices comprised of about 17% tax on diesel and about 15% taxes on gasoline with remaining 12/11% to marketing, 8/7% on refining and 63/67% to crude oil prices for diesel/gasoline respectively.[2,3]

The two taxes levied on gasoline in the US are federal at 21.7c/gallon and state taxes averaging at 18.4c/gallon (beginning of year 2009). However, on diesel, the federal excise tax is 24.4c/gallon and state taxes averaged about 22.0c/gallon (in 2008), both higher. [3] The EIA says that since Sept 2004, diesel prices have been in general higher than gasoline price because of increasing world demand and strong demand in China, EU, and the USA. The diesel price was also affected by transition to ultra-low sulfur diesel [4].

Situation in Europe is different with diesel taxes accounting about 50% and gasoline taxes about 60% (in 2008) of the consumer retail price (price at the pump) [5]. This translates to extra $3 and $4.2/gallon of diesel and gasoline respectively. I am not sure why the lower average tax rate on diesel, but I speculate it is due its historical predominance in use for agriculture and construction industry. Historically, diesel has been cheaper than gasoline although the price difference is shrinking.

Note, that in EU there is a excise tax and VAT. VAT is % derived from price, so as the underlying price of crude oil increases, VAT will amplify this increase. Moreover, there is a tax minimum of 0.359/L_gasoline and 0.302EUR/L_diesel [6] (2006 numbers; almost same as US tax per gallon, a factor of almost 4x difference), while European bureacrats are trying to level off fuel price differences between countries to avoid unecological “fuel tourism”. As prices are unlikely to decrease in such a plan, this will mean yet higher gas and diesel prices overall.

What may be surprising is that the average tax rate for heating gas oil in EU is about 28%, almost half of that for gasoline and diesel which is reflected in its lower price varying by the country, between $3-4 per gallon, much closer to US $3/gallon (I did not find the tax rate on heating oil in the US). A remarkable exception is Italy, where heating oil costs about the same as diesel, $6/gallon [1]. Since in Italy, the heating oil tax is about $55%, it explains the high price there, although not the relatively low price given 56% tax rate in the Netherlands [5].

Closing comments – It is important to realize that the price comparisons between US and EU are influenced by EUR/USD exchange rate which has fluctuated between lows of  ~1:1 in 2000 to highs of ~1:1.5 in the past decade.

What do you think would happen in the US were the Federal government to double or triple taxes on diesel and gasoline?

References:

[1] http://www.eia.doe.gov/emeu/international/prices.html

[2] http://tonto.eia.doe.gov/energyexplained/index.cfm?page=gasoline_factors_affecting_prices

[3] http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp

[4] http://tonto.eia.doe.gov/energyexplained/index.cfm?page=diesel_prices

[5] European Commision, Energy. Evolution of oil and petroleum product prices and taxation levels during the year  2008 in the EU, http://ec.europa.eu/energy/observatory/oil/prices_en.htm

[6] http://ec.europa.eu/energy/action_plan_energy_efficiency/doc/impact_assessment_report_en.pdf

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3 Comments

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3 responses to “Do you think gas is expensive?

  1. vinnydjerseyshore

    What do I think would happen if the federal government where to double or triple taxes?? I think people would drive less. We saw significant demand destruction for gasoline during the summer of 2008 as gasoline reached $4 dollars or more in most areas of the country. People’s driving habits actually changed, both substitution and conservation took place. Car pooling, public transportation, hybrid cars and flat out driving less were the result of high gas prices reducing both traffic and pollution.

    • jetengine10

      I think the public and private companies would be up in arms if the gov’t were to triple fuel taxes. It’s true that increasing fuel prices can create an incentive for individuals to use less money but it also means that UPS, Fedex, Coca-Cola, Walmart, and any other company that deals with shipping items will either have to eat the increased expenses for operations or pass it on to the consumer. Either case is a lose-lose. If we as a society want to encourage people to use less fuel or use fuel more efficiently I would much rather see tax incentives to promote good behavior rather than taxes to punish bad behavior.

      • gatorgreg

        I agree with the sentiment though I am skeptical it would work. I like the concept of promoting good behavior but perhaps my cynicism will not allow me to believe it actually works.

        I do agree 100% on the ramifications commercially on high taxes on gas. The EU has a better train system and a higher population density to allow for higher gas taxes. The US could attempt the same idea but it could very well slow economic development in the US to a crawl.

        I think the answer is improved fuel efficient cars and a train system devoted to high speed freight trains. People always talk about high speed passenger trains but a high speed freight network would allow savings on road repairs, road expansion, and even improve shipping times. A trucker can only work a certain number of hours/miles in a day if I am not mistaken as well as it is restricted to high traffic fluctuations and speed limits. Trains should be much more efficient. I will probably post my blog thoughts on the matter next week.

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