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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Here’s Why You’ll Pay Higher Gas Prices Whatever The Market

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The average gasoline tax in the U.S. is 49.5 cents per gallon, according to data from the American Petroleum Institute. That’s not too bad as far as averages go, but it has been climbing over the last five years and it will continue rising as states lose hope that the federal government will chip in for infrastructure construction and maintenance, and transportation.

Washington has been wary of raising the federal fuel tax. So wary, in fact, that the last time it adjusted the rate was more than two decades ago. Meanwhile, international oil prices have been jumping up and down, cars have become much more fuel efficient, and inflation has been biting into state income from gas taxes. In addition, there is a whole new challenge in the shape of electric vehicles that in the future will increasingly undermine fuel sales income for states.

Left with no options, 22 states have raised their fuel tax since 2012 and more will likely resort to the unpopular measure in the coming years. Since January 2017, Governing magazine notes, three states have passed laws to increase the gas excise tax: California, Tennessee, and Indiana. In California, the total tax, state plus federal, is now 57.20 cents per gallon. In Tennessee, the figure is 39.80 cents. In Indiana, the overall tax consumers pay on a gallon of gas is 51.24 cents.

According to one research organization, the Institute on Taxation and Economic Policy, the number of states that have already introduced higher gas taxes is unusual, and what’s more, this number will continue to rise, with another seven states likely to pass higher gas tax laws before the end of the year: Alaska, Louisiana, Wisconsin, South Carolina, Oregon, and Oklahoma, and West Virginia. Why? Because, although taxpayers can hardly be too happy about it, business groups are backing the higher taxes, ITEP analyst Carl Davies. Related: 3 Reasons Natural Gas Is Heading A Lot Higher

It’s a simple truth, though not a widely liked one, that states—and national governments—need income from taxes to produce goods and services for the people who pay the taxes. While it’s true that in the last decade there have been good reasons to keep prices at the pump steadily taxed, now that demand for road infrastructure and transport services is growing, states are finding themselves short of the money needed to respond to this demand.

The Great Recession saw prices shoot up to above US$3 per gallon, and by 2014 they’d gone above US$3.50 per gallon. That would have been a very bad time to even consider raising the tax. Yet now prices are at historic lows thanks to shale and to a global glut. In fact, prices are so low that on some part of the States, rivalry between two or more gas stations has led to prices as low as US$0.95 and even US$0.78 per gallon. True, these extremes were touched for a few hours but they are indicative of price developments prompted by global fundamental trends.

So, drivers across the states that have not yet hiked their gas tax can reasonably expect that, in the not too distant future, they will have to pay more for gas, regardless of which way global prices go. That’s the bad news. The good news is that these global prices are unlikely to go much higher than they are now, as long as shale producers continue ramping up their output and lowering production prices. Unless, of course, it turns out that the shale boom is actually a bubble as some observers argue.

By Irina Slav for Oilprice.com

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