Low Gas Price ! Good for the US?

I feel low gas price is detrimental for the US, considering the way tax dollars are being used by the government and the paradigm shift in the way economy operates.

No doubt I feel a lot better at the pump these days and regret less driving a performance car. But high gas prices make me happier knowing that in this demand supply equation, high prices indicate that the economy is reviving and people have the funds available to purchase more. Since the Fed is trying all the monetary tools (like cutting Fed rates & funds to failing businesses) to increase money supply and thereby push the overall demand, a deflationary trend in major commodities like gasoline tells me the policy ineffectiveness. But that’s just gas price as an indicator.

Necessity is not always the mother of Invention but innovations and discoveries are normally aimed at incentives when a business pursues it. So low gasoline prices could put to rest many of the R&D efforts in improved technology, new sources or alternatives. For Instance, Toyota sold less hybrids at $2/Galon gas (Check sales number of Toyota Prius when the Gas was $4 and now); It would be less viable to drill newly found oil fields in Brazil or continue exploration in Arctic for fossil fuel at $2/Gallon. Same story is true for the electric line-ups now being demonstrated in Detroit Auto Show. Projects like creating mass transit facilities like electric trains in all cities will have few takers due to low potential demand as people have no incentive for taking a train as compared to riding their own car.

Government makes huge infrastructure investment (with Tax payer dollars) every year to maintain or build roads and bridges. This is where the Washington lobbyists protects the interest of Auto Manufacturers or resist any alternate form of transit.

So going back to the economic principles, we will have to create a new incentive system to motivate businesses and individuals to achieve the bigger goal of reducing fossil fuel consumption. I think it’s fair for the owners of the vehicle to pay for the maintenance of the road infrastructure(Not the whole country). When the auto makers sell cars, people just pay sales tax not a road tax. Many countries charge a road tax on the top of the sales tax and that could be 10% of the cost of the car, paid an yearly basis. Further, the Government should put an additional tax of $1-2/ gallon and that will automatically work as an incentive to consume less. When driving is part of their work, gasoline should be treated like a cost of production and should get the tax credit.

These two additional taxes in place, the incentive system looks lot better for an ordinary Joe. The tax he pays depends on what he buys- let it be car or gasoline. He pays a lot less when he takes a public transport so whatever discomfort he has is paid for. When he buys a gas guzzler he is prepared to pay a lot more, everyday, than his neighbor who rides a fuel efficient car.