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The case for higher gas prices

24 August 2010 Tom Libby

The August 23, 2010 edition of Time Magazine includes a segment from Michael Mandelbaum's new book, "The Frugal Superpower: America's Global Leadership in a Cash-Strapped Era". In the cited section, Mandelbaum argues that higher gas prices would improve national security by, among other things, reducing U.S. dependency on the Middle East and also weakening anti-U.S. countries such as Iran, Venezuela and Russia. There are also several reasons related to the dynamics of the U.S. new vehicle industry why higher gas prices make sense. Most importantly, higher gas prices would shift consumer demand away from larger vehicles in favor of smaller cars and light trucks. We saw these shifts occur in the spring of 2008 when gas prices spiked to more than $4 a gallon nationally and demand swung dramatically towards smaller, four-cylinder vehicles and away from larger SUVs and pickups.

If gas prices were pushed up as Mandelbaum recommends, higher natural demand for smaller vehicles would raise prices for these vehicles, which in turn would increase small vehicle profits for both dealers and manufacturers. Manufacturers would then be more motivated to design, engineer and assemble smaller vehicles (and salespeople would be more motivated to sell them as commissions rose) and similarly less inclined to focus on larger vehicles. Manufacturers would also be naturally motivated to develop alternative powertrains, reducing the need for external (government) financial assistance in these endeavors. Over time the manufacturers' corporate average fuel economy would rise on its own, lessening the need for external regulations such as CAFÉ. This would save money for both the government and the U.S. taxpayer.

In general, higher gas prices would encourage vehicle manufacturers to build what consumers actually want, as opposed to the present landscape in which the OEMs are frequently building and then selling at a loss something the consumer may not really want in the first place.

Mandelbaum notes that actually getting a gas tax through Congress is no small feat, but the benefits are substantial and perhaps need to be communicated more often in ways such as his book.

Posted by Tom Libby, PolkInsight Advisor, Polk (08.25.2010)

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