Why Seven Dollar Gas Is Good for You

Because Lester Lave says it is.

Dr. Lave is a professor of economics at Carnegie Mellon's Tepper School of Economics. I spoke with him last week concerning seven dollar gasoline and much else.

"Seven dollars would reflect the true price of gasoline in today's market," says Lave. "That price would incorporate a carbon tax ranging from thirty to forty dollars per ton."

Lave goes on to say that such a price would lead to a diminution of the importation of oil from the Middle East into the United States while leading to intense conservation efforts and an accelerated transition to new sources of energy.

Lave is essentially advancing the externality argument with respect to gasoline pricing, that is, the notion that the full cost to the economy and the consumer is not now captured in the pump price. Most advocates of this position cite military expenditures to secure the Middle East as the principal externality or hidden cost, but Lave is more concerned with the impact of petroleum consumption on global climate change of which he says, "It's very likely to occur at this point. We're conducting an experiment today involving the entire planet."

What about the effects of an approximate doubling of fuel prices on the poor? "Get rid of the payroll tax at the same time you increase the tax on motor fuel," Lave insists. "The payroll tax is steeply regressive and hurts the poor. They will have more money in their pockets if we do this even with the fuel price rise. But they'll still be discouraged from using fuel as much."

"It all seems very logical," I allow, "but do you think many people will be convinced? Do you think the public can be persuaded to accept gasoline prices of that magnitude?"

"No, I don't. Not now, and that's unfortunate. If I could be the sacrificial lamb for enabling this I would be, but there isn't the political will to do this. The experiment we're conducting will run its course. We're about to find out what happens to a planet when you raise its average temperature several degrees."

But assuming the political will could be built, what adaptations might be required of the public, I ask.

"It doesn't have to be that onerous. Northern Europeans pay that much for gas today, and their standards of living are not depressed. But I won't deny that major changes would have to occur in American life. We live in low density communities that depend heavily on automotive transportation. We live in energy inefficient houses. Enhancing energy efficiency is really the low hanging fruit. Beyond that, we'll have to make major changes in infrastructure and in the way we think of products. We also need to look at the way work is scheduled. Public transportation systems intended for commuting often have very low usage factors except during rush hours. That's not very efficient."

Lave is highly concerned about the development of unconventional fossil sources for liquid fuels, particularly that fuel source which we have covered extensively, namely oil shale. "I don't think that resource should be developed at all," Lave asserts. "The effect on the carbon balance could be catastrophic."

I conclude the interview with question of what effect seven dollar gasoline would have on consumption patterns, which obviously such pricing is intended to change. "The demand is fairly inelastic," Lave avers. "You might need prices as high as ten dollars a gallon before you experience really large declines in usage. But the purpose of such pricing is not only to reduce demand. You would also want the revenues to go toward the development of new energy sources and more efficient utilization technologies."