Three cheers for expensive gasoline

For the third time this year, Prime Minister Binyamin Netanyahu rode in on a white horse at the last minute to rescue the country from an expected increase in gas prices. But as soon as the nation completed its collective eye roll, the reality sunk in that gasoline had reached its highest price in Israel''s history.

At NIS 8 per liter ($8.16 per gallon), citizens were justifiably upset at the toll the new price would have on their pocket books.  Finance Minister Yuval Steinitz poured unnecessary salt on the wound by claiming that the price was the inevitable result of sanctions on Iranian oil; the nation obviously prefers expensive gas to a nuclear Iran, he said.

In fact, much of the price comes from the 48 percent excise tax Israelis pay for their fuel. A Finance Ministry official even went so far as to say the Treasury had already lost NIS 2.5 billion in revenues from Trajtenberg-related gas tax decreases, and didn''t plan on lowering them any further.

But setting aside the brazen politics, the very real question remains of how high gas prices ought to be for a country like Israel. And as it turns out, there are some strong policy reasons to keep gas prices high.

While economists say prices should reflect basic supply and demand, they also argue that taxes (or subsidies) may be called for when a specific product has “externalities”—costs (or benefits) not borne by the buyer or seller.

In this case, gasoline usage contributes to air pollution (and all the health implications associated with it) and traffic congestion. Governments spend money on roads and infrastructure to facilitate driving, and deploy militaries to secure strategic energy supply lines.

According to the International Energy Agency, gasoline taxes are “justified by the environmental and energy-security benefits that those taxes yield, in addition to the revenues that they generate. By driving up retail prices, taxes curb the growth in domestic demand, reduce air-borne emissions and lower import needs.”

For those who remain unconvinced, The Center for Investigative Reporting put together this handy video on the subject:

In Israel, expensive gas''s desired deterrent effect on additional drivers should be desirable to anyone who has suffered through the horrendous daily rush-hour congestion. The ubiquity of small cars, motorcycles and bicycle commuters here is a testament to the impact of high gas prices.

Alternative forms of transportation are also freer to enter the market when competing with wallet-busting fuel costs.  Shai Agasi’s Better Place will charge about 12 cents a mile for its electric cars, which is about the cost of driving a regular car at $3 a gallon. Next to current prices, it’s downright economical.

Yet, there must be a limit to how much tax can be levied to account for these negative externalities.  At a certain point, high taxes start to slow economic growth by eating at people''s disposable income.  So what’s the right price for gasoline?

While an in-depth economic study would be necessary to calculate the optimal price for gas in Israel, some comparisons offer insight. On the one hand, Israel has among the highest gas prices in the world, as the following chart demonstrates: 

On the other hand, the price is on par with countries economically similar to Israel. It’s about the same as the EU average and lower than prices in the Netherlands (NIS 9.22 per liter), Britain (NIS 8.46), Norway (NIS 10.19), all countries that impose high gas taxes for policy ends. Plus, prices have been steadily rising all over the world—not just in Israel—due to both the steadily improving world economy (which creates greater demand for fuel demand) and fears of a supply shock from Middle East instability.

Analyses on the low cost of gas in the United States calculate that if its military expenditures, subsidies to oil companies and environmental costs of gas were added to its price, it would cost between $8 and $15 a gallon. In a sense, everyone else in the world benefits from America''s expenditures; they subsidize oil companies and fight wars over oil so we don''t have to.

But what about people struggling to make it on low Israeli salaries who pay through the roof to fill up a tank of gas?  Unlike Israel’s 16% Value Added Tax—considered regressive because it covers every product and hits everyone across the board at the same rate, regardless of economic standing—gas taxes are somewhat progressive in that they tend to target the wealthy more, a goal any social protester worth her salt should appreciate. In Israel, car ownership is highly correlated with wealth, so the less well-off are probably not the ones paying the high price of gas anyway. Only 26.5% of the poorest fifth own a car, whereas 86.5% of the wealthiest fifth drive their own vehicles. 

Of course, as a JPost editorial pointed out, high taxes on new cars create obstacles on purchasing new, fuel efficient vehicles; Israel should give tax breaks for the purchase of low-emission, environmentally friendly cars. Also, unlike European countries paying exorbitant amounts for gas, "Israel has yet to develop an efficient public transportation system, though significant steps in the right direction have been made." If discouraging vehicle usage is to help justify high gas taxes, the taxes must be invested in infrastructure and robust public transportation (perhaps even on Shabbat, as Meretz argues).

Through all the hubbub, gasoline prices may have somewhat obscured the fact that electricity prices have also risen some 25% since August. Therein may lie the real economic problem.