How High Should Gas Prices Go?

With gas prices constantly hitting new records, John McCain struck a populist chord last week with his proposal for a gas tax holiday. After all, with pump prices for regular now averaging $3.57 a gallon, who wouldn't like to lop off the 18.4-cent federal tax on each gallon you pump into your car this summer? It seemed like such a good idea Hillary Clinton jumped on the gas tax holiday bandwagon too. Only Barack Obama said he didn't like the idea because it takes funds from federal roadwork. However, Obama did vote for a similar gas tax holiday as an Illinois state senator in 2000. (Article continued below...)

But America's top car dealer says what we really need in this country is high gas prices—something in the neighborhood of $6 a gallon—if we ever really want to tackle the critical issues of the day: global warming and our oil addiction. "The biggest lie in America politics today is to say you care deeply about global warming and advocate for the price of gas to go down," says Mike Jackson, CEO of the AutoNation car dealer chain. "Those are mutually exclusive concepts."

The fact is, as much as we gripe about gas prices, we're pumping just as much of the precious liquid into our tanks as ever. Every day in America we burn through 391 million gallons of motor fuel. That burn rate is the same as last year, when gas prices were 70 cents per gallon lower. And gas consumption is up 18 percent from a decade ago. The federal Energy Information Administration just predicted we would finally begin to curb our consumption this year for the first time since 1991—by an underwhelming 0.3 percent.

What's driving this demand? Our lust for large cars and long trips. Oh sure, small car sales are rising and SUV sales are tanking. But in the last 20 years the weight of our rides has increased by nearly half a ton per vehicle, while the average horsepower has climbed from 118 to 223 ponies under the hood, according to the EPA. And as we have migrated ever deeper into the exurbs, the average miles driven per household has jumped 42 percent, from 19,000 miles in 1980 to 27,000 miles last year, according to federal statistics. Last year car buyers ranked fuel economy 17th on their list of priorities, just below cup holders and the car's stereo system, according to a survey by CNW Research, a respected automotive market analysis firm.

Now, with panic at the pump, mileage matters more. But we're not dramatically downsizing our rides the way our parents did after the oil embargos of the 1970s. Instead, many of us are just tightening the belt by one notch, like Eileen Noren. With fillups now hitting $100 on her hulking Infiniti QX56 SUV, she is ready to replace it with something slightly smaller—a seven-seat Chrysler Town & Country minivan. The Infiniti gets 12 mpg in the city and 18 on the highway, while the Chrysler gets 16 mpg in the city and 23 on the highway. The Wilmette, Ill., mother of four expects to save $20 to $30 a week at the pump. The only trade-off: the minivan has one less seat than the SUV. Still, she won't have to resign from the mom's carpool consortium for the track team. "We'll just drive one fewer kid," she says.

Back in the days of gas lines and stagflation, our parents ditched the Chevy Caprice and replaced it with one of those new little Datsuns. But we're not making that kind of transportation sacrifice today, even though we've blown past the inflation-adjusted record gas price of $3.40 a gallon set back in 1981. Why not? Because we're a far more affluent nation today, and the prospect of $4 gas just doesn't threaten the family budget as much as it used to. Back in 1980 gas and oil expenditures accounted for 5 percent of our personal income. Today, even at these prices, gas accounts for just 3.5 percent of our personal income, according to the Bureau of Economic Analysis.

So what would it take to curb our oil enthusiasm? Gas at $6 a gallon, says Jackson. And to get to that daunting price, Jackson says Washington needs to jack up gas taxes the way the Europeans have. In Western Europe, where gas tops $7.50 a gallon, more than half that price ($4.67) is taxes, according to AutoNation's research. Here in the United States we're paying about 40 cents in federal, state and local taxes on a gallon of gas. This helps explain why new vehicles sold in America average 25 mpg, while European cars average 36 mpg. "The dirty little secret is that it's all about the price of the fuel," says Jackson. "It's not that Europeans are better people than us. That society decided to tax gasoline to encourage consumers to make trade-offs to favor fuel economy."

That's all fine. But even Jackson admits his gas tax idea is DOA, since raising taxes is a suicide mission for any politician. President Bush is trying to break our oil addiction with tougher new fuel economy rules that his transportation secretary, Mary Peters, announced this week on Earth Day. By 2015 every auto company's passenger cars sold in America have to average 35.7 mpg, up from 27.5 mpg today, while minivans, SUVs and pickup trucks must average 28.6 mpg, up from about 22 mpg today. That adds up to an overall average of 31.8 mpg for all new vehicles sold in America by 2015, a big step up from 25 mpg today. This is all on the way to achieving an overall 35 mpg average by 2020, but it is coming much faster than Detroit or its detractors expected. "I can't believe I'm saying this," says environmental activist Dan Becker, "but the Bush administration actually got one right."

However, others wonder if Americans will actually buy these more fuel-efficient models, which the government predicts will cost as much as $979 more than today's cars. After all, fuel economy in America has actually gone in reverse over the last 20 years, from an average of 22 mpg in 1987 to 20.2 mpg last year, according to the EPA. That's due, in part, to the fact that the rise of the SUV was never contemplated when Congress first passed fuel rules back in 1978. Now, though, we're used to riding high in a comfortable, commodious cabin and don't want to turn back. "Even if you jack gas prices up to where they are in Europe, people here still won't drive those little cars," says Global Insight auto analyst John Wolkonowicz. "We've been conditioned to believe those are cheap cars."

Another aspect of the European model that hasn't translated to America is the love of diesel engines. More than half the cars sold in Europe are equipped with diesels, which get 20 to 40 percent better fuel economy than gasoline engines. But they also pollute more. So American regulators have outlawed them in several states, including California and New York. Auto companies are engineering cleaner diesels aimed at meeting America's tougher regs, but now the price of diesel fuel is accelerating faster than that of gas. Diesel now averages $4.23 a gallon, up from $2.92 a year ago. Suddenly the diesel deal isn't sounding so good. "At almost a dollar a gallon more," says Wolkonowicz, "it's becoming very hard to justify paying the $1,500 to $2,000 extra for the diesel engine option."

But it might not take pricey technologies or outlandish gas prices to change our guzzling ways. Social stigma and inconvenience could do it, says Tom Kloza, energy analyst with the Oil Price Information Service in Wall, N.J. Kloza suggests that shopping malls and municipal parking lots start requiring the drivers of big rigs to park in the spaces farthest away. Or the popular electronic EZ Pass that commuters use to pay tolls without slowing down could be restricted to lighter cars while the heavyweights have to line up at the toll booth. All rental cars could be outfitted with GPS navigation so we don't waste gas getting lost. His most controversial idea: stop giving driver's licenses to 16-year-olds and we'll decrease the ever growing population of gasoline gulpers. "The laws allowing 16-year-olds to drive are based on an old agrarian economy where you needed to be licensed to drive a tractor or to drive to the grain elevator," says Kloza. "Why isn't there any dialogue on creating a national driving age of 17?"

That's a dialogue any of the presidential candidates could open if they really wanted to do something about America's oil addiction. Because as any economist will tell you, nothing cuts prices faster than a sharp dropoff in demand. If we consume less gas, we're likely to pay less for it. That's a bit of straight talk, though, that has been absent from McCain's rhetoric about the gas-tax holiday. In the past McCain has called for tough fuel rules that would help combat global warming and reduce our dependence on foreign oil. In spite of that he is the presidential choice of 70 percent of auto executives, according to a recent survey by Detroit's Dykema law firm. But Dykema attorney and former GM exec Frank Dunne finds the climate-change hawk's call for a gas-tax holiday "intellectually dishonest."

Kloza goes a bit further, calling a gas-tax holiday "caca." "It represents pandering. You're not leveling with the American public," says Kloza. "All this talk of energy independence means nothing if you don't have energy discipline. When it comes to our gasoline consumption, we're the morbidly obese of the world. And like the person who weighs 350 pounds, we need to exercise more and consume less." To do that, though, first you have to look in the mirror and admit there's a problem—and it's not the price of gas.