One part of the high US gas prices is the big increase in the crack spread — the profit refiners take as compared with their input costs — has increased sharply. As a result, refiners are taking just under $1 more per gallon.
They’re able to do this because refineries closed during the pandemic, when fuel use was low. We went from 18,976,000 bbl/day in March 2020 to 17,944,000 bbl/day, or a cut in capacity of about 5.5%. This means that in order to avoid having actual shortages of gasoline, fuel consumption needs to drop by that much. Since Americans depend on cars to get to work, a really huge increase in the price is necessary to drive down consumption solely through price-mediated market mechanisms.
If we managed to cut consumption another way, that same inelastic response to changes in price would result in a huge drop in domestic prices. Fortunately, the US actually has the resources to do exactly that.
I propose a three-pronged strategy:
- The first mechanism would be through getting people back onto mass transit. Ridership is way down from pre-pandemic levels. New York City publishes a daily number, and it’s still under 2/3 of what it was in 2019. Getting people back onto transit, say by choosing to drop the price to zero, and having celebrities create social approval for it would lower fuel consumption.
- The second would be remote work for people who can do that. Employers don’t really need everybody in the office, and every person who doesn’t have to commute is one less car burning gas.
- The third is bicycles and ebikes. Almost half of commuters travel under 10 miles, which is well within the range that can be comfortably traveled on an electric-assist bicycle in 40 minutes or so. Ensuring the availability of secure parking and chargers at work, along with executive participation would result in a significant percentage of Americans choosing to travel this way, which requires far less fuel than running a car. Since a huge number of bicycles and ebikes were sold during the pandemic, Americans have a large stock of the necessary equipment, which could be deployed without the need for additional manufacturing or imports.
Between the three, we can comfortably cut fuel consumption by well over 5% in a matter of months, which would cut the crack spread back to its historic norm of about 35¢ per gallon, which would limit the impact on families who can’t afford the high prices and live in places where the options above aren’t viable.
These will also cut our greenhouse gas emissions, and likely drop world oil prices slightly, helping to defund Putin’s army.