Are Gas Prices Too High? Or Is Your Car Too Big?

Many Americans seem to be in disbelief that gas prices have hit an all-time high.

It has not been that long. The last time we had high gas prices was in 2011. At just under $4 a gallon, prices maxed out. Prices were adjusted against wages or inflation. It was a big issue in the presidential campaign. The issue was basically forgotten because we adapted by fracking the hell out of the Great Plains.

Until now. Oil prices have gone up because of post-pandemic demand and Russia's invasion of Ukraine. Some Democrats want a gas tax holiday, while Joe Biden blames oil companies for not taking him up on the permits he offers, and Republicans say environmental policy is to blame. Some economists think Congress needs to give financial guarantees to the industry.

Everyone and their mother is angry about the high price of gas, in part because Americans are back to driving as much as they did before the swine flu epidemic. We aren't going to the office, but we aren't staying home. Drivers from Virginia to Colorado will be greeted with a sticker of Joe Biden when they pull up to the pump.

The counterfactual is that if we had made changes on the demand side, we wouldn't be facing those high prices. Some people thought this might happen. President Barack Obama took that moment to set new Corporate Average Fuel Economy standards, known as CAFE, which put in place ambitious fuel efficiency goals for automakers.

A combination of high gas prices, low crime rates, and a new generation of people led to the widespread sense that the American city was regaining its old appeal. Some people, especially the young, older households and those who work in the center cities, will increasingly be able to afford $4 gas, according to an economist in the Harvard Business Review.

Americans didn't end up living in smaller homes, driving smaller cars, or taking more public transit. We did the opposite.

We would have been better positioned to weather sticker shock at the pump if those things had happened. It will only get worse as road trip season arrives and summer blends arrive from the refinery. There is a winter blend and a summer blend of gasoline that can be adjusted to evaporate at different temperatures.

What happened to the standards? One-size-fits-all miles-per-gallon goals were not fair to producers of bigger, heavier vehicles. The auto companies drove a giant pickup truck through the loophole created by the Obama administration. They argued that the standards were still unfair because Americans wanted bigger cars. They stopped manufacturing sedans in the U.S. altogether by the end of the year.

Some analysts thought this might happen. Steven Skerlos, a University of Michigan professor who studied the CAFE standards, predicted in 2011 that the loophole for larger cars would produce unforeseen consequences. Very possible. Will that cause more pollution? SUVs and pickup trucks were in high demand as gas prices fell to a 15-year low. Two in three new vehicles sold were SUVs or pickup trucks, up from less than one a decade earlier.

It had a number of consequences, such as killing a ton of pedestrians, but for our purposes, the important thing is that it made America more sensitive to high gas prices than we might have been otherwise. According to research from the Paris-based International Energy Agency, a large share of fuel savings produced by the CAFE standards has been offset by increased vehicle weight and power. That's a lot of gas!

Is the automakers responding to American demands or focusing on their most profitable products? Both. The federal policy of hiking the gas tax when oil prices fell, discouraging the design of massive new trucks that get 20 miles to the gallon, might have made car buyers less troubled by today. Burning less gas is a bonus for the climate.

Helping people live without cars entirely would have been a demand-side change. When gas gets expensive, a car is a necessity for a job, an education, or a social life. During periods of high gas prices, American transit usage has traditionally risen, but in cities where vehicle traffic has bounced back from lows, residents may have an easy off ramp from fueling up.

Most people don't have that option because politicians spent the last decade refusing to build housing there. They allowed car-free or car-light neighborhoods to appreciate into exclusive enclaves while population growth shifted into the suburbs. Many more would have liked to be able to leave the car at home now and again if real estate prices were any guide.

The last gas price spike did not prompt us to change our lifestyles. With gas prices in some states starting to look like the frequencies of AM radio stations, we're driving bigger cars and living in places where we need them. It's hard to reverse those trends overnight. Biden and the Democrats are thinking about cutting gas taxes and drilling in the upcoming elections.