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March 27: Lester Lave Says Oil Prices Aren't High Enough


Geof Becker                           

Carnegie Mellon Economist Says
Oil Prices Aren't High Enough

Renowned Tepper School Economics Professor Lester Lave
Says Gas Should Cost $7 a Gallon To Reduce Demand

PITTSBURGH—While business, government and consumers alike lament the continuing rise in the price of oil, one of the nation's leading energy economists believes that fuel costs are actually well below what they should be to reflect actual market value. 

Lester Lave According to Professor Lester Lave of the Tepper School of Business at Carnegie Mellon University, the real cost of a barrel of oil is more than  $200.  Lave also believes this truer cost of oil should be communicated to the market with a gasoline tax that raises the price of a gallon of gas to about $7. He says this would help to curb demand, stimulate the economy and break America's dangerous addiction to oil. (To hear Lave present his argument for a gasoline tax, click here.  Lave's commentary also is on Carnegie Mellon's YouTube site.
"When you consider all the factors, the price of gasoline in the United States is far too low at even $4 a gallon," says Lave. "If Americans had to pay $7 a gallon, which better reflects the real costs of a barrel of oil, we would finally see the shift in consumption behavior that would break our dependence on foreign oil, which is costing us dearly in terms of national security."
Among his recommendations for reforming the system is a new tax to bring fuel prices on par with those throughout Europe and Japan. Although he acknowledges such a tax would be unpopular among consumers and elected officials alike, Lave believes it would actually serve as a boon to the U.S. economy, adding nearly $500 billion to federal coffers. The funds could be used to eliminate the payroll tax on the first $20,000 of income, helping poor families and stimulating the economy. 
Lave says consumers also should be better informed about the true fuel costs for the vehicles they purchase. Instead of displaying the "miles per gallon" obtained by vehicles, carmakers should tell consumers the total estimated cost of fuel use over a vehicle's lifetime. That way, consumers would find easier to calculate the long-term financial implications for fuel consumption by the vehicle they purchased. Lave believes such clear information would spur purchase of more fuel-efficient vehicles.
"We must stop playing the victim and take charge of our own future when it comes to a national energy policy," Lave said. "The result would be not only an economic boost and a more sustainable energy policy, but a significant step forward in terms of national security and reducing the importance of imported oil."
Lave is considered one of the nation's leading energy economists, and is a leading researcher and consultant on issues of energy policy and risk management. His work has been extensively published by leading journals. He is a member of the Institute of Medicine of the National Academy of Sciences and has been a member of the Environmental Protection Agency's Science Advisory Board since 1986.