Now that Minnesota’s gas tax is increasing, will it mean higher pump prices for consumers as Gov. Tim Pawlenty and nearly every news organization in the state has said?
“No, you can’t say that,” said Mary Welge of the Oil Price Information Service (OPIS) in New Jersey, a national authority on fuel pricing.
“There are so many factors that go into pricing that a state tax increase is relatively small,” Welge said.
Consider: Minnesota’s gas tax will increase by 2 cents April 1. Assuming pump prices for regular gas would average $3.10 by then, the 2-cent tax increase would be .6 of 1 percent, which is so small it won’t even figure into a rounding error.
While it’s generally true that increases in costs are paid by the consumer, very small cost increases often are not passed on. And in the dizzying world of gas pricing, it seems something so small as a tiny uptick in a gas tax has no influence, as a practical pricing matter.
In the case of pump prices, pricing is based almost entirely on supply and demand. “It’s what always drives pump pricing,” Welge said.
By the time Oct. 1 rolls around when another 3 cents in state tax is added for a gallon of gas, some experts — including those at OPIS — are projecting that regular gas could be at $4 a gallon or more. And that would mean the additional 3 cents would once again be less than 1 percent of the influence on gas prices, and be lost.
Prices in other states
The point of state taxes and pump prices for gas can be seen in a survey of states. Minnesotans currently pay an average of $3.04 for a gallon of regular, which includes 20 cents in state gas taxes.
However, Georgians pay only 12 cents in gas taxes and yet pump prices in that state average $3.16. Indiana’s gas tax is 2 cents a gallon lower than Minnesota’s, and its pump prices average a dime more.
Wisconsin’s gas tax is 11 cents higher than Minnesota’s, but pump prices next door average only a nickel more.
And anyone who drives around the Twin Cities metro has observed that pump prices can vary by a dime a gallon at stations only a short distance apart.
“It’s supply and demand at the retail level, with the price of world crude having an obvious influence,” Welge said.
The crude oil factor
The price of world crude is another interesting subject. Welge said the “fundamentals” of supply and demand are not driving those world prices — at least so far as the United States is concerned.
Supply and demand are in balance worldwide, Welge said, and the driver of world crude prices now is financial, most prominently the falling value of the U.S. dollar.
C. Ford Runge, an economist at the University of Minnesota explains: World crude prices are pegged to the U.S. dollar, so when the value of the dollar falls world prices are increased to make up the difference.
What it also means is that stronger currencies relative to the U.S. dollar, like the Euro or the Yen, act as a buffer to crude prices in nations with those stronger currencies. And so, as the dollar falls the Euro gets stronger and an adjustment in world crude prices has no effect in the European Union.
“OPEC [the Organization of Petroleum Exporting Countries] has been upset about the situation for some time now,” said Runge. He said there is talk about pegging world crude to a “basket of currencies” for stability. But with falling confidence in the dollar, the effect will be that gas prices will continue to rise here as the dollar loses world value.
Welge said that in the current pricing situation Americans may expect to see gas prices at or above $4 a gallon by summer.
At his press conference the other day after his veto of the gas tax was overridden, Gov. Tim Pawlenty said that when gas prices soar to those levels there will be political pressure from consumers to decrease the state gas tax.
So would lopping a nickel off the state tax mean that consumers notice a decline in price at the pump?
Not necessarily, Welge said, because the same supply/demand and world crude prices factors have influence far beyond a nickel.