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Gas Taxes Need to Be Raised to at Least $2 Per Gallon

June 28, 2022, 8:46 AM

In 2019, BP’s Statistical Review of World Energy estimated the world had about 1.7 trillion barrels of oil left to be extracted. The US Energy Information Administration (EIA) concluded that the world consumed 92.2 million barrels per day for the Covid-19-impacted 2020 calendar year, for a total of about 35 billion barrels consumed. A standard 42 gallon barrel of oil can be refined into about 19 gallons of gasoline.

Some quick math yields just a little bit more than 32 trillion gallons of gasoline left to be refined at a use rate of about 665 billion gallons per year. All things remaining constant, that works out to dry wells and empty gas pumps in about 45 years—around 2067.

It’s a difficult number to pin down and even more difficult to predict moving forward, but the global exploration and production market for petroleum has been estimated to be in the vicinity of $5 trillion per year. That figure, extrapolated out over the 45 remaining years with no adjustments for inflation or anything else, comes to $225 trillion. Finally, the US Environmental Protection Agency suggests each 42 gallon barrel of oil is responsible for about 432 kg of carbon dioxide.

Pulling all these disparate threads together, we have a limited resource that is due to be completely depleted by 2067. It goes without saying that with each barrel of crude oil we extract and subsequent 19 gallons of gasoline we consume, we are reducing the total resource. And with each barrel of oil extracted, there are negative externalities that are born by the planet rather than any parties to the exploration, extraction, or refining process—namely, carbon and other unwanted compounds added to the environment.

A few things can be deduced from this. First, all extraction costs remaining constant, it should be the case that with each barrel of oil extracted, the remaining barrels have an increased value. Second, the actual cost of a barrel of oil, and consequently a gallon of gasoline, should account for both the depletion of the resource and the externalities society as a whole is otherwise left footing the bill for.

Negative Externalities

When someone fills their early model Hummer with a thousand gallons of gasoline and chugs around the suburbs with the air conditioning on and the windows open, one needn’t account for the exhaust plume coming out of the tailpipe—that is a negative externality. The pollution that the residents’ ears and lungs of said suburb and the surrounding area must endure is not accounted for in the price of gasoline. Whether you fill up a Prius or an SUV, the cost per gallon remains the same.

This example illustrates the difference between the market price of gasoline and the true cost of gasoline—the latter including the internalizing of externalities. Enter gasoline taxes. Gasoline taxes are excise taxes applied to a gallon of gasoline to offset the costs to society of gasoline’s production, transportation, and consumption. They exist at both the federal and state level, the former being 18.4 cents per gallon and the latter varying by state but being around 31 cents per gallon. The total, on average, is about 50 cents per gallon.

What Does a Gallon of Gas Really Cost?

Each gallon of gasoline consumed includes a rolled-in exchange between the oil and gas industry, society, and the consumer of said gasoline. Your Hummer burns one gallon and, in return, you get to drive something like 5 miles. Society gets the social good of employment for the oil and gas workers and 50 cents per gallon in a little savings jar labeled “The Oceans Are Boiling and We Are Running Out of Oil.”

What is all that money compensating for? With no oil and no gas, that $5 trillion per year goes away or is absorbed by other industries. Society will be in the red on that investment in just a shade north of three years. That’s not great.
It is a bit of an “anyone’s guess” situation, but reports have put the potential cost of climate change at about $23 trillion by 2050—and that’s just in terms of failed crops, weather damage, and the like. Rolled into that figure is the estimated $100 to $300 cost per metric ton to remediate carbon dioxide, with a barrel of oil responsible for about half of a metric ton. It is impossible to account for the loss of life that will also likely be widespread. 2050 isn’t 2067, and one can expect climate change will continue to impact the global economy in the intervening years, but let’s just work with that $23 trillion number.

For society to approach being made whole on each gallon of gasoline extracted and consumed, it will need to include the cost of the loss of a $5 trillion per year industry and the loss of $23 trillion in output. If you wanted to offset the losses incurred by the destruction of the oil and gas industry for a three years, you’d need $15 trillion. That puts us at a very modest $48 trillion needed by 2067, with $16 trillion contributed via existing gas taxes for about a $32 trillion shortfall under the current taxing regimes.

Appropriate Tax Rate

If you take $48 trillion divided over the remaining 32 trillion gallons of gasoline, you get $1.50 per gallon—roughly three times the current average. As above, this does not account for anything save for the eventual loss of crude oil as a resource and the portion of the global economic output lost to climate change by 2050. This also assumes every penny of the gas taxes collected are being set aside for offsetting those costs—not for the maintenance and building of roads, tunnels and bridges; not for subsidizing public transit; not for compensating for oil spills or leaking tank remediation, schools, or other environmental causes the existing 50 cents per gallon tax goes toward.

Indeed, if a gas tax regime is to continue to fund the projects the existing regime funds and internalize only the monetary externalities implicated in the extraction, production, and consumption of a gallon of gasoline, the tax must be no less than $2 per gallon. States maintaining a combined rate of less than that figure, much less those that are less than the current average, are being subsidized by states with higher rates. Folks in Alaska (8 cents per gallon) should thank Californians (53.9 cents per gallon) for footing some of their bill, and we all should be asking to pay more at the pump.

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Twitter at @leahey.

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