How Much We Care About Gas Prices

If the price of crude oil rises, the impact can depend on where we live.

Let’s take a look.

Gasoline Prices

The price that we pay at the pump responds to oil prices, state taxes, environmental regulation, and the cost of the supply chain.

The Supply Chain

Hidden from most of us, our gasoline had a long journey before entering our tank. Having traveled to a refiner through a pipeline, tanker, truck, or train from a foreign or domestic producer, the oil was processed as a generic product. Then, after it moved from large storage terminals to smaller blending terminals, tanker trucks took care of the “last mile” and brought our gasoline to a retail destinatioin.

The cost of the journey matters but not how you might expect.

When the supply chain is more expensive, an oil price hike has less of an impact on the retail price. As a result, when oil prices went up during the Iraqi War, drivers in Oklahoma paid appromiately 48 percent more for gas while those of us in New Jersey could have had a 9 percent increase.

State Taxes

With California at the high end and Alaska quite low, state taxes also make a difference:

The Dallas Fed Study

With so much unfolding behind the scenes, we can ask if  price spikes and dips affect our mileage, our discretionary income, and carbon emissions. According to a recent paper from hte Dallas Federal Reserve, we respond to a price change more than previously estimated. That means we will change our driving behavior. However, the one area not appreciably affected is global carbon emssions.

Our Bottom Line: Elasticity

An economist might have responded to high and low gasoline prices with one word, elasticity. The impact of a tax that increases the price of gasoline or a subsidy that lowers it depends on your price elasticity of demand.

Elasticity is the demand concept that recognizes how each of us responds to a change in price. If that response is minimal, as with medication, then our price elasticity of demand is inelastic. We want those pills or that gallon of gasoline, no matter how much we have to spend. Other drivers though are price sensitive. More elastic, their willingness and ability to buy a pricier gallon plunges when cost is up.

From here, we should consider individual household differences. After all, our incomes and commuting habits can affect our elasticity as the presence of public transit and the stage of the business cycle. .

Sp,returning to where we began, yes, the price of gasoline depends on where we live.

My sources and more: Since the Dallas Fed is my go-to place for oil and gas info, I was delighted to discover their new research on gasoline prices. Meanwhile, do take a look at econlife’s focus on global gasoline prices several years ago. Please note that sections of today’s Bottom Line were in a previous econlife post.