Dropping fuel prices during COVID-19, but should they be?

Fuel prices are again coming to attention due to the pandemic, and people are wishing for a lower price. First, it is clear that with everyone staying home the demand for fuel has reduced significantly, and this alone should decrease the price of fuel without any intervention. Then the question is, should we allow fuel prices to drop any further or should we intervene with production to keep prices stable? Some people are freaking out about the government intervention for lower prices, but perhaps the reasoning for humanity outweighs the fiscal and environmental costs.

Oddly enough, even though there is a decreased demand for fuel, there is more attention at the federal level to put downward pressure on fuel prices. This, in some ways, makes absolutely no sense. When the quantity demanded of a product reduces, so does the price for consumers. However, now the government is aiming at policies that would cause fuel prices to drop even more. This is simply unnatural and goes against the point of letting free markets run their course. When prices are going to naturally fall, why should we push it even further or faster? Maybe it has something to do with the risk of 30% unemployment. If 30% of the people whom desire to work are no longer employed they will still need fuel. These individuals are clearly the most affected by a high fuel price, so in a way artificially lowering fuel prices (via government intervention) is an extra method of stimulus.    

Think of it this way, there are many ways to stimulate an economy; lowering interest rates, providing stimulus checks, reducing taxes, any method that puts money in the pockets of society. Well that’s exactly what’s happening here, if the government can find ways to control the oil industry, they will be, in a small way, stimulating the economy. As a point of reference, fuel prices can affect GDP by about 2-5% on average.

Environmentally, though, we can see another story. The US actually has some of the lowest price per gallon compared to other first world countries. Look at the UK for example, today their average price is $5.79 per gallon [1]. Today in the US the average price is only $2.26 per gallon. That is less than half! Well, this trend has been pretty standard for years. Yes, we could argue they charge more for fuel in other countries because they also offer mass transit. The argument is, then why is NY currently at $2.37 per gallon? They offer mass transit very similar to the UK. The difference lies in where the money goes, other countries apply these extra tax dollars to correct for the environmental impact imposed by the fuel. This is no different than paying $.05 extra for a bottle of water, and if we recycle it we get our nickel back.

“Gasoline and Diesel Fuel Update” [3]

Lastly, there is an argument to keep fuel prices stable, and possibly even higher. In 1990, the average price per gallon in the US was $1.30. Well, inflation has, on average, been 2.45% a year since 1990. If we adjust for inflation this means that if fuel costs $2.79 it would be the equivalent of paying $1.30 in 1990! Basically, we are paying less for fuel today than we did in 1990. With this perspective, we can see that perhaps fuel prices are slightly lower than they should be. Of course, one would argue by comparing to 1999, the year a lot of Americans would argue was the best for them financially. In this light, Fuel would have to cost $1.90 today to be the equivalent, and thus maybe we are paying more than we should be.

At any rate, the issue at hand is that the government is looking to lower fuel prices, and there is clearly going to be an economic impact from doing so. It could potentially help stimulate the economy by making it “extra” affordable as we risk 30% unemployment. It could spark aggravation from an environmental impact side. Or, as per our last argument, it’s time for a price reduction if we want to party like it’s 1999.

“CPI 1990 – 2019” [2]

[1] “CNN/Money: Global Gas Prices.” CNNMoney, Cable News Network, money.cnn.com/pf/features/lists/global_gasprices/.

[2] “Consumer Price Index, 1913-.” Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis, www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-.

[3] “Gasoline and Diesel Fuel Update – U.S. Energy Information Administration (EIA).” Gasoline and Diesel Fuel Update – U.S. Energy Information Administration (EIA), http://www.eia.gov/petroleum/gasdiesel/.

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