On June 22 President Biden asked Congress to suspend federal gasoline taxes for three months. It’s a fixed tax, 18.4 cents per gallon. At over $5 a gallon, it’s less than 4% of the current price. It goes without saying that the motive is to give drivers a small break during the summer driving season.
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I get it. This is the first normal summer in over two years. I don’t know many people that are changing their summer vacation plans in what seems to be the first normal summer in over two years. I myself plan on driving a bunch and yeah, high gas prices sucks.
Now that I stated the obvious, let me state the non-obvious. If Biden’s plan is to fight inflation, his solution could backfire.
It’s Political
We all feel the pain. I understand what Biden wants to achieve. I understand that he wants to take some of the pain away from the consumer. I understand that he wants to give families a little bit of breathing room. I understand that he wants less inflation. Of course inflation is deeply unpopular heading towards an election.
But it’s also about the politics. The Democrats are going into the midterm election deeply unpopular and they need to show something. They need something tangible that says “hey we provided relief from gas prices”.
If Biden and the Democrats were serious about fighting inflation and high gas prices, they would focus the real issues behind high prices and not just try to apply a short-term band aid for political gains.
Biden’s solution is not going to fix the high gas prices. A temporary reprieve from the federal gas tax will make the problem worse. Maybe a lot worse.
- The problem behind high gas prices is supply. Not demand. We don’t need more demand. We need more supply.
- Dropping the gas tax will boost demand for gas. It’s supply that needs to be address.
- How are you going to meet that extra demand when supply is already stretched? This mean one thing: Higher gas prices.
- Even if you pump more oil out, you still need the infrastructure to support it. You need to distribute it and you need to refine it.
- Refineries are even more constrained now so supply is nearly fully inelastic. There’s supply capacity but it’s in Russia. And that’s no-go.
- If it takes 10 years to build a refinery, and another 10 years to break-even, in a context where there’s no social acceptability for these projects, you can see why nobody wants to build one.
- How much really will be passed to consumers? Retailers can simply raise the base price of gas to make up the difference.
- The federal gas tax is 18.4 cents per gallon, less than 4% of the current gasoline price. Plus, a break on a fixed rate looks even worse if gas just keeps getting more expensive. The tax is fixed, so as the price of crude oil rises, the tax accounts for a proportionately smaller share of the total retail gas price. The more expensive gas gets, in other words, the less a tax break matters.
- Cheaper prices, if any, will encourage more driving and as a result more pollution.
- And what happens once the “holiday” is over and prices goes back up. Or will they extend the holiday. Governments are notorious for extending popular programs from “temporary” to the “permanent”.
- Removing the tax will turn out to be expensive. The tax provides an important source of funding for road construction. Expect road quality to take a toll. It’s also part of the bi-partisan infrastructure bill. They haven’t mention how to will make up for the short-fall.
- Other measures to curtail rising gas prices, such as releasing oil supply from U.S. reserves, haven’t worked.
I’m not a “tax” guy. I like paying less taxes as much as the next person. But this is not area where cutting the tax will do more good than harm. In the end, you might end up with higher prices. The oil industry is as complex machine. Removing a tiny tax is not going to solve the problem. There’s no easy fix.
Like I said, the solution is more supply. It’s often say the solution to high prices is high prices. There’s some truth to that. High prices forces consumers to change their behavior. Maybe drive less. Take the smaller car. Walk or bike more. Car pooling. Buy an EV. High prices leads to demand destruction. Higher prices also result in producers pumping more oil.
The Biden approach reminds me a little bit of the 70s. I wasn’t around during that time but I know people that were. I also read on the subject. Inflation was a major problem back then. And politicians kept throwing band-aid to the problem. Things like rent-control and price control were introduced. Nixon imposed a 90-day freeze on wages and prices in order to counter inflation. Then I think it went on for two years. On the surfaces the measures sounded good and they were politically popular but they were disastrous. It was called the Nixon shock. It didn’t go well. Inflation rose. There was an major economic failure (73-75). A recession. The problem became worse. People became poorer.
This tax holiday thing is a gimmick (Even Obama dismissed it as a gimmick in 2008 when he ran against McCain). This is coming from a President that canceled the Keystone XL pipeline expansion on his first day in office. And now he’s begging Saudi Arabia to drill more.
What’s needed is a serious plan to address energy security. Democrats and Republicans need to figure this out. They need to hit reset and work on a serious energy supply plan. Not just something to get past the next election.
The government’s role to set the conditions for the market to provide energy. Not picking winner and losers. We need a all-hands on deck approach. Oil, natural gas, wind, solar, hydro, and nuclear.
Of course, the perfect solution would be to use no oil. But we are not there yet. The transition to renewable will take time. Nuclear has to be part of the picture. It’s a carbon free.
The main question with renewables is: Can the world dramatically scale up green energy to power the economy as well as alleviate climate change—bridging the tension between energy security and climate security?
In the end, there’s no perfect solution, only trade offs.
