22 April 2008

The real price of gas

Oil prices surge again -- a barrel fetching close to $120 this morning. Gas prices are following suit. A national survey last week found the average price for regular was $1.19 a litre, the second highest on record. Public concern rises with the price. A Gandalf Group survey showed that Canadians believe the price of gasoline is the country's greatest challenge second only to the state of the healthcare system.

Yet gas remains a great bargain at the pump. The pump price is the market price, and markets lie through their teeth. You may pay $1.19 a litre, but you are only paying a fraction of the real cost.

To begin with, the pump price excludes the costs of the pollution that burning gasoline creates, including its contribution to global warming. There's the cost of policing roads and health costs incurred from road accidents. There's the tax subsidies to the oil industry through items such as the depletion allowance. All these are magnified by urban sprawl -- an urban design imposed by cheap gas. The International Center for Technology Assessment calculates that when all costs are included, the real price of a litre of gas is five to 15 times the pump price.

Economists call these excluded items negative externalities. External they may be, but they are real costs that have to be paid by all of us, whether we drive a little, a lot, or not at all. If drivers had to pay the full cost of a litre of gas, the world would change. Cities would be designed much more efficiently, and the environment would be a great deal cleaner and less at risk. We might keep all this in mind when we complain about the price at the pump. It may seem high, but it is in fact a remarkable, if highly deceptive, bargain.

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