Do people notice small changes in gas prices? I’ve been wondering about this lately—which gave me an excuse to download historical gas price data—and I learned a couple of things in the process. Consider:
Gas prices changed by 7 cents per week, on average, during 2008 and 2009. Sometimes prices went up and sometimes they went down, but they rarely stayed constant. What’s more, the price changed by very different amounts each week.
Much of the most intense volatility occurred during 2008 when gas prices broke the $4 barrier and then subsequently collapsed as the economy unravelled. But even in 2009, gas prices are changing 5 cents per week, on average.
Is 5 cents a lot? The answer depends on what you mean.
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Five cents is a lot historically. From 1993 through the end of 2007, gas prices changed by just 2 cents in an average week. Expressed as a percentage of gas prices, the average weekly price change represented less than 1.4 percent of the retail price of gas during that period (when gas prices were much lower). In 2009, by contrast, the 5 cent weekly change represents 2 percent of the retail price.
Five cents is also a lot, I think, in the context of recent policy proposals. The modest carbon tax proposed by the conservative Washington Policy Center would work out to roughly 3 cents per gallon of gasoline. The most recent gas tax increase in Washington—the hotly contested “nickel” tax of 2003—was, of course 5 cents. In Oregon, there’s a big to-do about whether to raise the state gas tax by 6 cents. And this year, Idaho’s legislature rejected a 2 cent tax increase. In other words, when we talk about gas tax increases, we’re mostly talking about pretty small sums of money—less than the weekly average price change.
What’s interesting to me is that it’s not entirely clear that consumers would even notice such small price increases. (That’s a different question, by the way, than whether consumers would be affected by the price increases.) For example, consider what would have happened to gas prices if the Washington legislature had passed ESHB 1614 last year, a bill that would have added at most 3.5 cents to the price of gasoline to fund Puget Sound cleanup.
In case you can’t tease this apart, the red line shows actual gas prices during 2008 and 2009; the green line shows a hypothetical price if a 3.5 cent fee had been added starting in January 2009. (The price, however, is a US national average, while the fee would have been specific to Washington.) As you can see, there’s not a huge difference between the two scenarios.
I’ve argued before that gas prices have a bigger effect on consumption than we think. But I’ve also argued that not all gas prices are equal. It appears that for a price increase, such as a tax, to reduce consumption the change should be big enough to notice and—just as important—the price increase shouldn’t be used to increase consumption. So there’s probably a good debate to have about whether 3.5 cents per gallon would be enough to affect consumption, given that every week the price of gas changes by 5 cents per gallon on average. My hunch is that it wouldn’t make much difference: it wouldn’t impact consumers in a serious way and it wouldn’t dent oil company profits (in part because oil companies just pass on price increases to consumers).
Needless to say, however, reducing gasoline consumption is hardly the only purpose of a fee or tax on petroleum products. State gas taxes are generally used to build and maintain highways. Other fees are used to clean up pollution. But insofar as we want to affect consumption with prices, my guess is that the price change would have to be outside the “noise level”—the ordinary fluctations we see every week — to have a significant impact. Discuss.