Is gas too cheap?

If you filled up your car in California this week, you probably noticed it didn’t cost much. Gasoline is a bargain, on average just $3.06 a gallon across the state. Even in high-priced San Francisco, it’s cheap: $3.24, and falling fast. Compare this to the statewide average of $4.26 a gallon six months ago, and it’s no wonder you noticed.

Supply and demand

There are lots of reasons for this surprising development, but it boils down mainly to a simple matter of supply and demand. The market is awash in new sources of oil, from the fracking boom in North Dakota to production increases in Russia, Iraq, and Libya. Also, the OPEC cartel was unable to agree on production cuts last week, so its large share of world output remains large.

But increasing supply is only half the story. Demand is down, too. The global economy is still ailing. Vehicle efficiency continues to improve. Some hedge-fund managers have pulled back from their too-optimistic investments in oil. Japan is moving back to nuclear power and needs less oil.

So gas is cheap in California, and the oil companies are suffering—a bit. They will suffer more in the future, since this mismatch of supply and demand is likely to recur, though not for precisely the same reasons. If you buy oil company stock now, you’re buying high, and you will eventually have to sell low. That’s reason enough to divest.

Not as cheap as it seems

But there are even more compelling reasons to sell your shares in oil companies—and to encourage CalPERS and CalSTRS to sell too. Gasoline is actually extremely expensive, but we pay only a small portion of the cost at the pump. We pay the rest somewhere else, or the society does, or the government. These hidden costs, which economists refer to as externalities, come in many forms, including:

• oil spills and cleanup
• water and air pollution
• traffic congestion and accidents
• additional healthcare costs and premature deaths
• government subsidies and tax distortions
• environmental sprawl
• protection of oil sources, including Middle East wars

The greatest externality, of course, is climate change. The carbon dioxide we spew into the atmosphere, from transportation and other sources, is creating incalculable disruption. As the World Bank recently reported, the earth is already locked into a 1.5°C temperature rise, and “Everyone will feel the impact, particularly the poor, as weather extremes become more common and risks to food, water, and energy security increase.”

$15 a gallon? More?

So how much do we really pay for gasoline when these hidden externalities are included? It’s not a simple question to answer. As long ago as 1998, when the pump price was $1.00 a gallon, the International Center for Technology Assessment calculated that the real cost was at least $5.60 and may have been as much as $15.37 a gallon. In the 16 years since, external costs have ballooned, especially as the effects of climate change have become clearer. Recent estimates put some real local costs as high as $38 a gallon.

In any case, gasoline is much too cheap. Its true cost has long been hidden, harming the economy and endangering the environment. Perhaps it’s really $15 a gallon, perhaps higher. When we come to recognize that much of that cost is silently shifted to us in insidious forms, we will insist that it be transferred back to the oil companies, where it belongs, in the form of regulations or carbon pricing. These old-energy companies will then either transform themselves into modern renewable-energy companies to survive, or they will wither away.

I doubt that they are nimble enough to transform themselves. And that’s the best reason of all to divest.

Photo: Creative Commons, some rights reserved, Flickr/cobalt123.
Cross-posted at 350 Bay Area.