Onwards to $7, $10 per gallon, and why a gas tax giveback is a bad idea

In 2005, CIBC World Market’s Jeff Rubin predicted oil would double to $100 per barrel, attracting more derision than respect. Now the petro-oracle is predicting prices will double again from today’s level to $225 per barrel within four years, a per gallon price of about $7. Of course oil price predictions are probably about as reliable as a fortune cookie, but it’s worth considering just how many factors are lining up to suggest oil will keep heading up, regardless of a recession in the US. Over at Weiss Research, analyst Sean Brodick names the two biggest: under-estimated demand growth in China and India, a dynamic which could lead to $10 per gallon prices.

Much as this freaks out American drivers, they have to start getting used to it. In Europe, prices today are around $9 per gallon. In January, I criticized the EIA’s forecast that per barrel oil prices would average $87 in 2008. Admittedly, the year is barely a third through, but the EIA forecast is looking increasingly silly. If there’s silver lining here it’s that gas is finally beginning to reach a price where US driving and car buying habits are fundamentally changing. Gasoline consumption is predicted to actually fall this year, for the first time in decades, as America’s addiction to heavy cars, huge homes, and ultra-long commutes implodes.

Which gets me to all the ban-the-gas-tax idiocy circulating in the Clinton and McCain campaigns. Three quick points. First, lowering the price of anything generally increases consumption, certainly not our goal here. Second, microeconomic theory tells us that the removal of a tax is likely to be partially, possibly entirely, recaptured by the oil companies, the great villains in this whole drama. And lastly, with fiscal and trade deficits at record highs, the value of such a giveback is paltry for drivers: short lived and a small percentage of driving costs. Yet the damage to national accounts will compound and grow, further burdening future generations. Face it, high price gas is here to stay, so a better plan is to help drivers adjust to this new reality by encouraging higher-mileage technologies and mass transportation.

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