The Benefits of High Gasoline Prices

First Published: 2007-11-23

(This essay looks at high gas prices and what should be done about them. The Bahamas did not get into the predicament of over reliance on the automobile over night, and there will be no immediate solution. However, there are measures we as individuals can take to help ourselves.)

Nassau is a community that is almost totally dependent on the automobile. And with a gallon of gas now pushing $5 ($4.51 at this writing) the complaints at the office water coolers and coffee machines have resumed.

What does this mean for our economy?

Consumers are not the only ones bothered about the high cost of fuel – so is the Central Bank. Here is what the bank’s monthly report for March 2007 had to say:

"The Bahamian economy is expected to continue on a path of stable growth during 2007, underpinned by tourism-related investments, alongside healthy private sector demand.

"Nonetheless, recent increases in global oil prices, combined with signs of softness in the US economy, could impact this outlook should such trends persist."

What seems like a throw-away line from the Central Bank, could just as easily become a serious matter where the country’s Bahamian dollar reserves are concerned.

The more money we spend to import fuel, the less we have available domestically for consumer and commercial loans. And a contraction of credit acts as a brake on the economy.

Of course a slowing economy means – tough times might be ahead. But let’s not despair. There are some things we can do about it.

The Automotive Industry & Government Revenue

The government gets about 40 per cent of its revenue from imports of fuel, vehicles and related products. This is a significant figure, and it will be painful to change this revenue stream over the near term.

To do so we will have to make some hard choices. The shortfall in revenues from auto and fuel imports will have to be offset by higher payroll, value added, sales, income or other taxes. And any changes must be done in a way that preserves our low-tax status.

Of course the best solution to lack of government revenue is to spend less but this option is rarely considered by our politicians.

Options

So what options do we have? We can start by becoming more discerning about how we use our vehicles.

For example, we should car-pool for school runs as well as work runs. And the more adventurous among us can ride bicycles or walk to and from the office.

If we improve the transit system more people will use the bus. At present, relying on the jitneys means enduring long wait times, inconvenient connections, unreliable service, unsafe driving and rowdy behaviour. These are some of the main reasons given by Bahamians for ‘needing’ a car.

We can also down-size and modernise the vehicles we drive. Our streets are narrow, so larger vehicles make passing and parking difficult at best – not to mention the fact that they use more fuel to travel the same distances.

Of course many vehicles produced today offer better fuel economy, but unlike the country’s pension managers we should not propose that government restrict the import of older vehicles as they propose government mandate that all Bahamians have pensions managed by them. That would not support public policy based on the principles of liberty and free trade. Competition and choice is important for consumers in the long run, and public policy should not be a tool for special interest.

We can consider alternative fuel vehicles (like hybrids) when they become available to our market. Unfortunately manufacturers won’t export these vehicles now because of concerns about servicing the hi-tech equipment, and because law enforcement and emergency officials need special training in the event of accidents. But as technology advances these vehicles may become a reality for our market.

These simple strategies may not solve our problems in the short-term, but we did not get in the present shape we are in overnight either.

However, these small steps will mean that less fuel will be consumed, leaving us with a little more pocket change, and more money for local credit. The environment will also benefit from a reduction in engine emissions, and our streets might be a little less crowded, making drive time more tolerable.

What the Government Should Do

In a nutshell, government should do very little on this. They have more important things to do like fight crime and shore up the judicial system.

However, the government can encourage citizens, without the use of force, to consider these, and other options to reduce fuel consumption.

Applying higher import taxes to vehicle or fuel imports or restricting imports is not the answer. Our pending entry into the World Trade Organisation seems to suggest that we will have to gradually discard import tariffs as a fiscal tool even though our tariffs serve as a revenue mechanism and do not restrict imports.

The government should use no more than moral persuasion. Every time political leaders speak on a subject they should include a message encouraging consumers to reduce fuel consumption. That message will gradually filter through.

And the jitney system should be sorted out once and for all – without a government takeover. Bus operators should be capable of making the system work within the confines of the law.

What Should We Do

First of all we should not encourage the government to "do something to fix" the problem. Their solutions most often lead to unintended consequences that are more often than not negative. Just read about the tolls to get into downtown London England or the odd and even license plate issues in Sao Paulo Brazil.

What we should do however is educate ourselves on the options available and change our personal habits as we see fit.

The free market (that’s us by the way) has the extraordinary ability to find solutions, and when it comes to high gas prices and traffic congestion, it will all sort itself out.

There will be winners and losers, and the automotive industry might be one of the losers, but that beats government coercion to solve the problem.

The Way Forward

Almost 40 years ago, the Checchi report on the future of the Bahamas had this to say:

"In the long-term, large autos must be seen increasingly as incompatible objects in the Bahamas. The scale of the island is small – power and high speed are inappropriate and unnecessary. Clear, unpolluted air is an asset…the Bahamas should seriously consider the adoption of new concepts in personal transportation."

We are now at the point where this has become a critical issue, for various reasons. The suggestions offered here are thought-starters on a debate that must take place in earnest. However, while high gas prices are bad for our collective pocketbooks in the short term, they will ultimately lead to lower consumption and the adoption of other fuels. Solving more than one of the "problems" discussed here.

So let’s raise a toast to higher gas prices!

 

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