Published: April 13, 2006

Set of Priorities

A quarter century ago, when I began purchasing cigarettes and gasoline in significant quantities, a pack of smokes and a gallon of gas went for about the same price – 65 or 70 cents.

Last week, a gallon gas was selling for about $2.65 in Vermont and while I was filling up, I noticed a pack of cigarettes now sells for $4.80. Some addictions are more expensive than others. I quit smoking years ago, but it was not the price of cigarettes that changed my behavior, I was just done smoking.

There’s a theory in economics that holds when prices for a given product
rise too much or too quickly, it throws the law of supply-and-demand out of whack. The law retaliates by “destroying demand,” which causes the price to fall back. Economists point to the Arab oil embargo of 1973-74, when gas was suddenly in short supply and Americans responded by buying small, fuel-efficient cars, turning down thermostats, etc. Demand dropped, oil producers lost money, the price of oil dropped and the supply rose.

In subsequent oil shocks – the Iran-Iraq war of the 1980s, the Gulf War, the Iraq invasion, Hurricane Katrina – there was less evidence of demand destruction. The price of a gallon gas is about 45 cents higher than it was a year ago. The Washington Post last week quoted the U.S. Energy Information Administration to the effect that gas consumption in the past year has differed by less than two percent from the year that preceded it, Katrina notwithstanding. Rising gas prices, at least the rises we’ve seen, are not enough to destroy demand.

Demand destruction would be a good thing. We need to trade our Hummers and Expeditions for the Datsun B-210s we bought back in ’74. There’s very little oil left in the world, we need to be smarter about how we use it.

In Vermont, the state legislature is a few weeks from adjournment, so the
pressure is on to get real work done. There are two tax bills before lawmakers; one would tax gas, the other cigarettes.

The cigarette tax, which is now $1.19 per pack, will go up. Some want to raise it by 60 cents a pack, some want to raise it 81 cents per pack. The money raised by the tax increase will go toward health care. By making themselves or other sick, the reasoning goes, smokers raise health care costs for all, so they should contribute to defraying those costs. It’s also thought that the price increase would be enough to destroy demand – or, by some calculations, entice 20,000 of the 96,000 Vermonters who smoke to quit.

The proposed gas tax is more modest, four cents a gallon for gas, six cents for diesel. Supporters of the tax are not hoping to change Vermonters’ behavior in relation to their driving habits; they’re trying to raise funds to qualify for a federal three-to-one match so they can spend it building and repairing highways. Earlier the governor tried to take the money from state education funds, only to be confronted by a lynch mob.

The state’s House of Representatives wants to increase the gas tax, the Senate prefers to raise the cost of auto registration and drivers’ licenses. Either way, no one is encouraging anyone to quit their oil addiction or destroying demand for oil, even though people are dying from it every day and unlike the case with cigarettes, most of the people dying are not the hard-core users.

The scarcity of oil and violence that surrounds its decline will be the dominating facts of our era of history. We have yet to rise to the occasion.

Originally posted at http://www.markfloegel.org