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Thursday, August 11, 2005

It's not the excise taxes

I find the short-run volatility of gasoline prices to be an interesting phenomenon. Anecdotal evidence suggests that a) the posted price is what gas stations expect to pay to refill the tanks (rather than what they paid to refill them last time), b) for every dollar change in a barrel of crude oil the price of gasoline at the pump will increase by three cents, c) there might be as much as fifteen dollars a barrel in the "terrorism premium", d) short-run elasticity of demand is essentially zero.

Some of my fellow economists have blamed state sales taxes for explaining the variation in price volatility across different cities, but gas taxes change rather infrequently and therefore a lot more is going on.

I generated this pic over at gas buddy:



The graph shows the two year pump price in Dallas-Ft. Worth, Atlanta, and San Francisco. The level difference between the SF series and the DFW and ATL series is caused by tax levels, right? California per gallon excise tax: 18 cents. Georgia per gallon excise tax: 7.5 cents. Texas per-gallon excise tax: 20 cents. (source here)

A couple of ideas. The reformulated gasoline restrictions in California are sufficently restrictive such that price is consistently higher in California than elsewhere. Alternatively, the demand for gasoline in California is permanently higher than it is every else, leading to greater prices. It is interesting that the ATL and DFW series are so close to each other.

I traded SF for Cincinnati (Ohio has a per-gallon tax of 26 cents per gallon) and got the following:



Notice how much more volatile the CIN prices are than DFW and ATL, although the CIN prices are much closer to DFW/ATL than the SF series. This is the phenomenon that has people scratching their head and wondering if their short-run gasoline requirements will shrink their disposable income to the point that there will be too much month at the end of the money. This is the phenomenon that deserves a better explanation. It isn't excise taxes and it isn't inflation - is it simply terrorism, is it fluctuations in world demand, the demand for fuel in Iraq/Afghanistan, or something else?

I am a little tired of hearing about the price of gasoline related to real prices in 1980, in the now tired expression "gasoline prices are still lower than they were in 1980 when adjusted for inflation." Great, got it. In 1980, I was eleven years old and not in the market for gasoline. I am not sure what good it does to tell me that prices are no worse than they were for my parents. Even for those who bought gas in 1980 are unlikely to truly understand the reference.

I believe that economists would be better off attempting to explain the short-run volatility of gas prices, which has everyone digging a little deeper (even us academics) and understandably concerned, rather than supplying the same glib remarks about real prices which noone really cares about.

Just a pet-peeve of mine.

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