TAG | gasoline
Sorry to harp on the gas tax holiday so much, lately, but this is hilarious:
I have no idea who I am voting for in this upcoming Presidential election, but I’m certainly looking more favorably upon Barack Obama after reading his reactions to John McCain and Hillary Clinton’s populist attack against gas taxes. From the New York Times:
Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season. But Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports.
I wholeheartedly agree. And so does one of today’s brightest economists, Greg Mankiw:
I don’t know any prominent economist who favors this McCain-Clinton proposal.
First, we have to realize that the increased gas prices are, although inconvenient in the short run, somewhat of a blessing. People are quickly starting shift away from driving larger cars, which will lower gasoline consumption in the long run. Additionally, if gas prices remain high for a long period of time, economic theory tells us that people will start taking larger actions to lower their gas prices, such as telecommuting or living closer to where they work. Additionally, this shifts more demand toward alternatives to gasoline-powered vehicles, such as electric cars, that don’t pollute and are by nature more efficient per mile than gasoline cars.
But all in all, we shouldn’t be thinking about suspending gasoline taxes, we should be thinking about increasing them. Although gas prices are high, the consumption of gasoline creates large externalities, which is a market failure that should be corrected through taxation. Additionally, by taxing gasoline at a higher rate, we could offset the income tax and payroll taxes. So overall, we could stop taxing people from doing a positive activity (working) and start taxing an activity that creates a negative externality instead.
(hat tip on this post: Greg Mankiw’s Blog)
I’m writing this article for the primary purpose of getting my thoughts onto a page. I always hear all of this talk about how the only reason that oil prices are so high is because of speculation. But that argument does not sit well with me because it ignores the underlying reason for speculation. The argument runs that oil/gas is not really as expensive as it is, because the prices are only high because of speculators screwing around in the market.
There is some truth to the speculation argument. Sure, speculators are buying oil, and the more demand to buy a commodity, the higher the price goes. But, this begs the question: why are they buying oil?
Speculators in this case are people that predict the price of oil will be higher in the future than it is now, so they, in the simplest case, buy oil now so they can sell it later when it is more valuable. If the price of oil goes up, it is because lots of people believe the price will go up in the future. That begs the question: why do they think oil will go up in the future?
And then we’re back to square one: why do commodity prices rise? If the only answer to that question is that prices rise because people think speculators will drive them up, then aren’t we just in an infinite cycle of inflation? Obviously, the answer to that question has to incorporate something other than whether speculators plan on buying the commodity or not. So I’ll give the classic, broad, economics answer: prices rise when the commodity becomes scarcer.
Scarcer can mean less supply, more demand, or a combination of both. And I don’t think there is a clearer example of scarcity today than oil. The world supply of oil is finite. Sure, we find new sources of oil every now and then, and we develop new technologies to extract oil from places we couldn’t get it from before, but no matter what, we have to deal with a finite supply on planet earth. Thus, every day, the supply of oil shrinks, and that contributes to a decrease in supply (along with occasional shocks from OPEC). Additionally, world demand for oil is ever-increasing. And not just in America. When the Tata Nano, that tiny $2000 car from India is released, and it puts hundreds of millions of new drivers in and around Asia on the road, gas prices will skyrocket [this is undoubtedly on the speculators’ minds].
So the high gas prices you’re paying may be technically due to “speculation.” But there must be reasons for speculation. I believe the primary reason is anticipated increased demand and anticipated decreased supply of oil.