And it might be a sign of things to come. Some of that is a good thing.
Filling your gas tank with liquid hydrocarbons right now makes you think you are hallucinating once you get your receipt. If you are a suburbanite who “invested” in huge, heavy, fuel-inefficient and spacious SUVs to bring little Timmy to daycare and then commute to work for an hour, each trip to the pump makes you want to pass out. Filling your 2021 Chevy Tahoe in the Bay Area is gonna cost you somewhere north of $170. And that will last you about 400 miles.
So assume that you see the error of your ways and are ready to trade in your ‘burbanite monster truck for a plug-in hybrid or a full electric car. You roll up to your local dealer’s empty lot and ogle the one car for sale. You look at the price breakdown and note that the Ford Mach-E you thought you were gonna get is listed with a markup of $10,000 above MSRP. Is Max making up stuff? No. Take a gander at what dealers are charging from this cool new crowdsourced site.
So you roll home, while drowning your sorrows in a bucket of heavily subsidized McNuggets you got from a drive through your car barely fits through and are sitting around the dinner table with your friends and family. While drinking your organic spiked Kombucha, you are having heated and angry discussions about “the system” and how it is stacked against you. Well, you’re probably not wrong, but over here we call it basic economics taught to lil’ Timmy in his first few months at college.
Let’s say you’re a dealer selling Fords. You are selling cars with four wheels like your competitors, but they’re slightly different from a Toyota. I mean, they are Fords! The beauty, unlike for undifferentiated things like corn, is that you can charge whatever you want for them, so you need to figure out what price will maximize your profits. Now let’s assume for a second that consumers really want more fuel efficient cars because gas is more expensive than beer, or in econ speak, the demand curve shifts out. Many people are literally willing to pay much more for that Mach-E GT than in the before high gas price times! You could be the nice hippie dealer and just stick with the MSRP Ford suggests you charge and let the consumer walk home with what we call “extra surplus”, which is the difference between what the consumer is willing to pay and what they are charged, or you could take a piece of that surplus in the form of cold hard cash. That is what a markup is. Most car manufacturers do not own their dealers, so you see this markup noted explicitly on the sticker in the window. For Tesla, on the other hand, who sell directly to consumers, this simply means raising the MSRP and bypassing the need to print out a sticker making this obvious! Which is exactly what is happening!
“But Max, does that explain why oil refiners and gas station owners are charging so much for gasoline?” No. That is a little bit more complicated. Gas prices are high because the input to production (oil) which is traded in a global market has become really expensive. But…Timmy would also learn that producers of gasoline would very much like to restrict output and charge higher prices than what the market would produce if left alone. And while this is hard to prove, the part of the supply chain where this is most likely happening is in refining, where refiners can restrict how much refined product (e.g. gasoline) makes it to market. This is the case especially in California where we require special gas that can only be produced in a limited number of refineries. There is a delicate waltz between how much you want to restrict output and raise prices to maximize profits, but you’re gonna have to come to my lecture to learn the deets.
“So thanks for boring me to tears Max, but I am still angry. Why are you giving me a basic economics lecture? I am already paying for Timmy’s tuition, and he is becoming just as annoying as you are!” Well, I think what we are seeing in gasoline retail prices may give us a taste of what is to come if we are serious about regulating carbon and other externalities such as air pollution, congestion and safety. A $100 carbon tax will raise gas prices by about $1/gallon. While politicians are not talking about a $1 a gallon carbon tax currently here, it is not unthinkable that the optimal gas tax is somewhere around $2-3 a gallon higher than it is now (which is about the increase in gas prices relative to the before times). And that is a good thing. Yes. You heard me right. High gas prices are a good thing if you care about mother earth and your grandchildren and understand basic economics. Also, a carbon/gas tax generates revenue for the government, which sends it back to you in some form. Oil company profits only benefit their shareholders and the owners of the resource, which is usually not really you.
“But what about dealer markups?” I like these as much as you do. This is where we are currently getting the exact opposite of where we want to end up. There is a literature on so called feebates, where gas guzzling vehicle buyers pay a tax raising their prices, which is then rebated to consumers who buy fuel efficient vehicles. This makes guzzlers more expensive and fuel efficient cars cheaper. Right now, we are seeing the exact opposite. The big markups are on the gas sippers and EVs.
So in response to high gas prices and big markups, each day brings another stupid policy proposal in this space. Cap gas prices. Boo. Put more ethanol in gasoline. Dumb. Send car owners checks to offset the price of gas. Dumb. (I would be OK with everyone getting a check with no restrictions on what you could spend it on). There are some voices in my head saying that maybe we should think about a policy that caps or eliminates dealer markups on EVs and their cousins. But that is highly problematic too! Why? First of all, this would do nothing to change the quantity sold, as all of these cars are flying off the lots already! It would only change who buys these cars (maybe people with less purchasing power and those that are clever at figuring out when new stock arrives – I mastered this in the early pandemic days with Clorox wipes deliveries at Costco!). But I think I have decided to not be worried about markups in the long run. EV supply in the long-run should be more elastic than the Short Run. In human speak that means that high prices for EVs lead to producers wanting to sell more. So they will make more. This will bring down equilibrium price in the long run. I hope this happens by the time my next hippie mobile is out.
Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.
Suggested citation: Auffhammer, Maximilian. “Driving is Costing You Dolla Dolla Bills!” Energy Institute Blog, UC Berkeley, May 23, 2022, https://energyathaas.wordpress.com/2022/05/23/driving-is-costing-you-dolla-dolla-bills/
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.