By now most everyone who buys gasoline understands that the price at the pump isn’t accurate. All they have to do is turn on the TV and see the BP oil spill in the Gulf. The cost of that spill is in the billions of dollars — and it isn’t in the pump price, but in the falling price of BP stock, and in the increasing costs of unemployment and environmental damage control and mitigation efforts. Those costs will be paid for by taxpayers, one way or another.
But they won’t show up at the pump. And they should. Economist’s call these costs “externalities.” They are real costs, but the market doesn’t directly acknowledge them. The market works on a simple profit and loss system and, normally, the price is determined by near term supply and demand. This gives a price that “clears” the market and balances supply with demand.
People are always trying to figure out the price of these “externalities,” and thus discover the “real” cost of gasoline (just one fossil fuel energy product among many) compared to the “nominal” price at the pump.
An easier way to know the “real” cost of fossil fuels is to figure the price that brings in alternative fuels. If someone could impose whatever price that’s high enough to bring on fossil fuel substitutes then the fossil fuel externalities disappear because it’s no longer the fuel being used. That’s the “real” price of gasoline: The price at which no one uses gasoline.
And even though that price is significantly higher than today’s pump price, it’s reasonable to assume that whatever the substitute price is initially, that price will decline over time as the substitute undergoes innovation and per unit manufacturing efficiencies.
Nevertheless, the studies continue trying to find the cost of externalities.
This from Ezra Klein over at the Washington Post.
“Most of us would call the BP spill a tragedy. Ask an economist what it is, however, and you’ll hear a different word: “externality.” An externality is a cost that’s not paid by the person, or people, using the good that creates the cost. The BP spill is going to cost fishermen, it’s going to cost the gulf’s ecosystem, and it’s going to cost the region’s tourism industry. But that cost won’t be paid by the people who wanted that oil for their cars. It’ll fall on taxpayers, on Gulf Coast residents who need new jobs, on the poisoned wildlife on the seafloor.
That means the gasoline you’re buying at the pump is — stick with me here — too cheap. The price you pay is less than the product’s true cost. A lot less, actually. And it’s not just catastrophic spills and dramatic disruptions in the Middle East that add to the price. Gasoline has so many hidden costs that there’s a cottage industry devoted to tallying them up. At least the ones that can be tallied up.
Topping that list is air pollution, which we breathe in whether or not we drive. Then there’s climate change, which is difficult to slap a price tag on because it involves such esoteric calculations as how much your grandchild’s climate is worth. There’s traffic congestion and accidents, which harm drivers and non-drivers alike. There’s the cost of basing our transportation economy on a resource that undergoes wild price swings.
Some of the best work on this subject has been done by Ian Parry, a senior fellow at Resources for the Future. His calculations — plus some data from other sources and studies — suggest that adding all the quantifiable costs into the price of oil would increase the cost of each gallon by about $1.65. According to the Energy Information Administration, the average price of a gallon of gas was $2.72 last week. It should really be as high as $4.37….”
Beezer here. Finally, at the end of the article Klein gets around to the point of this post’s headline. Eventually, one way or another, we have to develop substitutes. The real price of the development (as opposed to a full-on system replacing gasoline) of substitutes is what we need. Because if we don’t have a substitute that can be developed into a full system, then our only response to ever increasing gasoline prices is to no longer use the gasoline dependent machines. Might be a good time to buy bicycle stocks.
Again from Klein.
“That gets to the bigger issue, which is that energy sources are cheap or expensive only in relation to one another. And the heaviest anchor beneath our reliance on oil is that, at this point, there’s nothing to replace it with.
“We’re pretty much stuck with our dependency on oil,” Parry says. “We don’t have any substitutes. Even if we hugely increase the price on oil, we’d only have limited impact on it. People need to drive and get to work.”
That’s not to say there’d be no benefit to forcing gasoline to pay its full freight. Increasing the cost of oil could make other energy sources cheaper in comparison, and if the mechanism were a tax that would fund development of alternatives, that would hasten our transition. But it is the speed with which we can discover and refine those alternatives, more than the price of oil, that will decide our energy future.
The question, in other words, isn’t just what a gallon of gas costs. It’s what a gallon of anything that can replace gas costs. Maybe that’s what we should start asking politicians.”