Tuesday, July 11, 2006

Based on the most recent data from the Department of Energy, our demand for gasoline has not declined -- despite the price at the pump hitting $3 near everywhere. In fact, just the opposite is occurring as demand is above year ago levels. Gas prices were up 59.6% in May vs. the prior year, and yet in that same time demand had risen by nearly 1%, no drop-off. In fact, although the price of gas has dramatically increased this year, demand has increased in four of the first five months of the year.

Apparently, $3 per gallon is not high enough to curb our behavior, and it's obvious at this point that $2 per gallon was ridiculously cheap. Will $4 per gallon put a dent in our addiction?

It wasn't too long ago that Thomas Friedman wrote a column on a potential gas tax. He stated, "Only by bringing the total price of gasoline into the $3.50-to-$4-per-gallon range — and keeping it there — will large numbers of Americans demand plug-in hybrid cars that run on biofuels like ethanol. When large numbers of Americans do that, U.S. automakers will move quickly down the innovation curve."

Based on the data I cited above, Friedman is likely correct. The price of gas 1) needs to go higher, and 2) needs to stay there for some time. It's not just the level but also duration since Americans won't change behavior until they realize higher prices are here to stay. And note that when the tax is presented as a means to reduce global warming, nearly 60% of respondents favor it.

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