$3 Gas is Cheap!

Jonathan Fairbank

The price of gas is hovering near three dollars a gallon in most cities in the United States, and in some regions, it's more like $3.50 a gallon. Yet, people still drive their SUVs, bigger trucks and occasionally a few Hummers. More than that, the freeways and surface streets continue to jam. Friday nights on the eastbound I-10 in Southern California are still packed with weekend trippers. Kids are still driving their heavily altered Hondas. Yes, people complain about gas prices the way they do if it's too hot, and they go on driving.

It then appears that for most Americans, gas is price-inelastic--like medicine. We will pay any price to drive. Nothing beats the comfort, convenience and privacy of one's personal vehicle. Now, people will complain that there's inadequate public transportation in the country as a whole. I don't buy that. Even in car-dependent Southern California, there is an extensive network of bus and rail lines. Hence, gas price is inelastic not because there isn't a feasible alternative to the private car, but rather it is our car-obsessed culture that makes it so.

And moreover, Americans can afford to pay gas at three dollars or $3.50 a gallon. In fact, I have argued that we, as a society, can afford to pay upward of seven dollars a gallon. If we look at most European countries, gas prices have been around five or six dollars a gallon for many years. This is the direct result of high fuel taxes imposed by most European governments. The average European has less disposible income than the average American. This is the result of, again, high sales and income taxes and lower wages.

So our European allies have less disposible income and yet have been able to afford five or six dollars per gallon of gas for many years. Sure, Europe is not as rich and powerful as we are, but it is still enjoying First World status. Therefore, it follows that most Americans will be able to pay six or seven dollars a gallon of gas. We may not like it. But we sure can afford it.

So really, for too many years, Americans have been cheating the state and federal governments out of a lot of fuel taxes in light of our apparent ability to pay higher pump prices. From this perspective, three dollar gas is a bargain. Our economy can support even seven dollar gas.