Monday, November 28, 2005

gas prices and macroeconomics

J-Dub recently said..."I've been calling for a gasoline tax for years, and the Congressional Budget Office agrees. I know Darin will have something to say about this, but it's the best way to encourage the type of changes we need. A tax on gas would inflate the price of cheap oil that has a strong arm on our economy. Because gas is kept relatively cheap (notice how low the prices are now after public outrage), technology has little incentive to provide new methods. Cheap gasoline has already permanently damaged other types of transportation like rail traffic, and it encourages us to consume more. The environmental impact of burning gasoline is huge. Even if you won't agree that global warming is real, surely you agree that a gas combustion engine produces emissions that are harmful."

I responded on his blog in a long winded comment, but I figured I would sum up here...

A basic misunderstanding of macroeconomics…

Fuel prices are determined by thousands of individual market actors making thousands of individually beneficial decisions—there are contracts between oil companies and refineries and retailers, wholesalers, etc…. When people rail against “Big Oil” acting in concert to screw the consumers and make exorbitant profits, it conjures up images of marble lined conference rooms, leather chairs and long legged secretaries lighting the cigars of the wealthy “robber barrons.”
In reality, prices are determined by supply and demand. You reference this summer’s high prices as a result of these unscrupulous oil companies, and now that the public is alert to their nefarious ways, the prices have come down…..you are correct that prices were higher this summer than they are on average now, but you are wrong as to what caused it.
Hurricane Katrina (yes, the hurricane that George Bush single handedly steered into the Louisiana coast) took more than 10% of the U.S. refining capacity offline and knocked out some of the pipelines needed to deliver the gas from the gulf coast to the rest of the country. (It is very difficult to sail a super tanker right into North Dakota, so consequently they tend to take it to a port city and then truck it elsewhere).

In other words, a significant decrease in supply resulted in a short term increase in price. The market has responded, (imports increased) and prices have gone back down.

Congress can no more abolish the laws of supply and demand than a physicist could repeal the laws of thermodynamics.

If you increase the taxes on a gallon of gas, you will directly negatively impact the poorest among us, as they spend a disproportionately high percentage of their income on gasoline than the wealthy. Think about it, if the working poor among us make $600.00 a month, and they spend 2.00 bucks a gallon on 30 gallons a month—that’s 60.00 dollars a month keeping gas in their vehicle, then they are spending 10% of their income of gasoline. If you raise taxes on gas--- let’s say 50 cents, then that same 30 gallons now is 75 dollars a month and 12.5% of his pay. In return, the higher price of gas at the pump does not necessarily equal a diminished demand for driving…think about it—how far do you have to drive to work? Does that distance change when gas is more expensive? No, it just means that you will sacrifice more out of another budget bucket.
The path to hell is paved with good intentions, I am certain that you intend well, but if you study further you will come to different conclusions.


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