Crude oil: America’s addiction. Since the introduction of the automobile, America has become incredibly dependent on fossil fuels to power our various transportation services. We use gasoline to operate our cars, airplanes, and even machinery that make our everyday lives possible. While we are the third largest producers of crude as a nation, we are by far the largest consumers; more than doubling the usage of the second-placed China, as we burn through more than 18 million barrels on a daily basis. But as we have continued our dependence on oil, consumers seemingly have taken the brunt of the blow when it comes to gas prices at the pump. Though we complain about the average cost of a gallon here, our prices do not come close to some of those abroad, so why the discrepancy?
First things first, gasoline costs roughly the same amount of money no matter where it is produced in world, according to experts in the field. So the natural assumption would be that gas prices should remain relatively similar around the world give or take a bit in either direction. However, that is not the case; when it comes to the price of a gallon in U.S. dollars, the range spans from just $0.10 per gallon, all the way up around $9.70 per gallon depending on where you are. As a reference point, the average price of a gallon of gas in the U.S. is currently around the $3.65 per gallon level, putting us a long ways from either end of the global price spectrum [see also Ultimate Guide To RBOB Gasoline Investing].
Starting with the least expensive country, Venezuela, where a gallon of gas is reportedly cheaper than water, costing just $0.10. Venezuela lies at the very radical end of the gas price spectrum, as the nation employs a hefty subsidy on gas prices in order to sell a gallon of RBOB at approximately 98% below market value. But while this may seem like a pipedream figure, consider that these heavy subsidies take away money that would otherwise be used to improve infrastructure and other public systems, which may be hurting the emerging economy in the long run. Another key stat helping to keep gas prices down in Venezuela are its immense reserves, those of which have recently surpassed Saudi Arabia by some estimates. Other countries with heavy gas subsidies include Saudi Arabia, Qatar, and Kuwait. In fact, many analysts agree that these heavy subsidies in various emerging economies is leading to heavy demand, and driving up the overall price of gasoline around the world. Also note that all three of the Middle Eastern countries highlighted above are often ranked in the top ten for per capita oil consumption.
While some countries choose to subsidize gas prices, others tax gas very heavily. Take the Netherlands for example, whose gas tax is equivalent to $5.87 per gallon, making the price of one gallon ring in at at grand total of $9.58. Most Americans would be outraged to see $5.87 at the filling station, let alone the full $9.58 per gallon. Yet, this is still lower than Denmark, whose $9.69 per gallon price is currently making a pass at the unthinkable $10 per gallon mark. Prices this high do come with their set of advantages though, as governments can use the profits to pump funds back into public programs like the massive public transit systems that Europe is well-known for [see also 50 Free Web Resources For Commodity Investors].
Gas Prices At Home
As mentioned earlier, the current average price of a gallon of gasoline at home is sitting in the mid-$3 range, with a relatively cheap tax attached to it. The U.S. charges roughly $0.48 in tax on each gallon of gas (not including sales taxes in certain states), so while running into $4.00 at the pump may seem ridiculous, that doesn’t even match the taxes that some countries charge on their fuel. With such different tax structures in various economies, it has led to the debate as to whether or not the U.S. would be better off taxing gasoline more heavily, or perhaps subsidizing it.
As the largest consumers of oil in the world, a subsidy would certainly allow for easier transportation, which may help jumpstart companies during these tough times. It would also help out the average consumer who would now have to pay less at the pump. But consider if the U.S. were to raise the gas tax, which would also have its fair share of benefits. It’s no secret that our government is hurting for more funds, and a higher gas tax could help us pay off some of our extreme debt. If the government were to raise fuel taxes to $1.00 per gallon, assuming the current daily consumption of 18 million barrels per day, and the average barrel containing 42 gallons of gasoline, we could skim roughly $756 million dollars per day (or $275 billion annually) to help pay for necessary infrastructure as well as our debts. A $5 dollar gas tax could raise approximately $1.4 trillion annually, though it would be met with ferocious resistance from the American consumer [see also UBS Unveils Natural Gas, Crude Oil ‘Contango ETNs’].
Some argue that a higher gas tax would lead to better innovation in public transportation similar to the systems that Europe has, as consumers would grow frustrated with prices. While this may be true in larger metropolitan areas, Europe is far more densely populated and much more compact than the US. Another interesting theory says that a high gas tax would lead to better innovation in the kind of cars that we debut in our country. While the past few years have seen many companies for strong MPG figures, Americans have not been concerned about their mileage for the majority of the existence of automobiles, and especially so when gasoline prices were but a fraction of their current price.
In the grand scheme of things, it seems that for the forseeable future, Americans will continue their heavy usage of gasoline, as there are not many alternatives to driving to complete the necessary tasks for one’s everyday life, but consumers should keep in mind that the U.S. falls on the cheaper side of gas prices, and that it could always be much, much worse.
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Disclosure: No positions at time of writing.