In the days after Russia invaded Ukraine, there was a lot of talk about how America needed to stand shoulder to shoulder with Ukraine, supporting them any way that we could short of direct military action. That mood doesn’t seem to have lasted very long.
Today, politicians in America seem obsessed with shielding consumers from the impact of high oil prices. For instance, Maryland and Georgia recently paused their gasoline tax.
It’s difficult to think of a more counterproductive policy at this moment in time, even putting aside the impact on global warming. High gasoline prices are not a problem; they are a solution to the scarcity of oil created by the war in Ukraine. Tax cuts on gasoline have the effect of boosting global oil prices, which hurts almost everyone except the major oil exporters. Higher crude oil prices put money right into the pocket of Vladimir Putin, which helps to cushion the blow from economic sanctions.
PS. California has its own plans:
Californians could receive $400 per vehicle for a maximum of $800 for two vehicles. Eligibility would be based on vehicle registration, not tax records, to be sure the money reaches those who don’t file tax returns. Electric vehicle owners would be eligible. The money would come on debit cards, and would cost $9 billion total.
Newsom would pause part of the sales tax imposed on diesel fuel and an annual inflation adjustment to the gas and diesel excise tax this year.
Is this the best possible use of $9 billion?
READER COMMENTS
Aaron W
Mar 25 2022 at 4:39pm
I’m always really confused what it is about gas prices that make people constantly demand political “solutions”. When the price of any other good, even other essential goods, rises, it seems like there’s much less hysteria around it.
I was in a conversation the other day with two otherwise intelligent people about this. They both agreed, “Oh you know the oil companies are looking for any excuse to jack up the price.” To which I responded, “Yeah, and so is any other seller in any other market. That’s how they work!” That got some blank stares.
Scott Sumner
Mar 25 2022 at 5:09pm
The explanation is fairly simple; people generally don’t understand basic economics. I suspect that not one person in twenty understands basic supply and demand theory.
Fazal Majid
Mar 25 2022 at 7:19pm
Memories of the 1973 oil crisis, and to a lesser extent 1978.
‘That said, price rises are not the only way to address a demand-supply imbalance. Rationing is another, perfectly legitimate way to achieve that without effectively locking out lower-income people out of basic necessities like food or medicines. You could even make a Coasean argument for it.
The problem is state capacity in managing an effective rationing program, given how politically toxic it is so the necessary preparations cannot happen in peacetime.
Matthias
Mar 29 2022 at 3:22am
Rationing has lots of well known problems.
If you are worried about poor people, just give them money.
MarkW
Mar 26 2022 at 8:31am
High gasoline prices are not a problem; they are a solution to the scarcity of oil created by the war in Ukraine.
Why exactly has oil become scarce due the to war in Ukraine? The U,S. apparently has stopped buying Russian oil, but oil is fungible. Is Russia really having trouble selling its oil to anybody?
That said, I fully agree that the gas tax pauses and ‘send everybody a pony’ policies are economically moronic. Weirdly, the California response may be less dumb (in that it doesn’t directly lower prices at the pump). But, of course, these policies may be politically astute — and for elected officials, political considerations win every time. Though the real problem is not politicians (we all know what they are). The problem is the widespread economic ignorance that makes such policies popular. As usual, we’re getting the government we deserve, I guess.
Jim Glass
Mar 26 2022 at 9:28pm
If California really cared at all about the high price of gasoline it wouldn’t have regulated and restricted in-state supply so it had the highest gas prices in the USA to begin with. The politicians react just to the short term sudden change in price. Posers.
Of course taxing oil reduces demand for oil, stick that to Putin.
But being a bit pedantic, ISTM that probably in the short run the supply of gasoline is less elastic than the demand, which itself is fairly inelastic, which suggests most of the savings from a gas tax reduction at the pump will be grabbed by the retail seller instead of the consumer. I dunno, if this is wrong I’m glad to be corrected about it. If it is so, the politicians are self-defeating themselves yet again, unless responding to the retailers’ lobby.
I use this example because around here in the Northeast politicians are pushing temporary state gas tax reductions for a couple months or so until funding for them (such as from Covid relief funds!) runs out. Which projects to leave them facing the same gas price increases again a couple months from now, having accomplished nothing in the meantime except burning through funds that could have been spent on, I dunno (Covid relief?).
Mark Bahner
Mar 27 2022 at 4:41pm
Here is the best possible use of $9 billion (relative to the Russia/Ukraine situation):
All the countries of NATO contribute to a $9 billion pot, with the contributions apportioned on the basis of each country’s GDP.
The $9 billion pot is paid out to members of the Russian military, in whatever way is determined by Clever Economists (A.A. Milne capitalization for effect) to be most likely to produce favorable results. The goal is to get the Russian military to arrest Vladimir Putin, and deliver him to The Hague for war crimes.
Some possibilities:
1) Limit the individual payments to a maximum of $1 million…that would allow a minimum of 9000 members of the Russian military to receive payments.
2) Include an offer of asylum at the NATO country of their choice for each member of the Russian military and their families.
3) Greatly reduce or even eliminate the award if Putin is killed during the arrest and delivery process (unless he commits suicide).
If someone can point to an example of a paper that examines this sort of possibility for any country in any century, I’d be interested in reading it. If no such paper exists…WHY IN THE WORLD NOT? (How can this proposed approach be worse than the current approach?)
MarkLouis
Mar 28 2022 at 7:38am
Does the Fed have the level of sophistication required to account for pro-inflation stimulus from states? Seems straightforward but thus far the Fed appears to not have command of even basic facts.
BigAl
Mar 31 2022 at 10:30am
I don’t think anybody really has a good grasp right now of the price elasticity/inelasticity of oil.
There is absolutely off-the-charts/prodigious demand for oil as a result of huge upward surges in airline and cruise ship activity as a consequence of all that pent-up desire for travel that accumulated during the first two years of COVID. The shortage of hotel rooms in major cities and tourist spots is absolutely insane right now. Ultimately, I feel that the airline and cruiste travel sectors are of very little true economic value – but like it or not they employ extremely large amounts of people – so they are protected. The cruise industry is a particular sacrew cow because about 85% of its 190,000 jobs are concentrated in Florida (a big electoral vote prize in presidential elections).
A few other things to consider:
a) Oil/gas prices were very high in 2007/2008 prior to the Crash. There was very little demand destruction prior to the Great Recession and, in fact, there was less demand for oil in spring 2009 than in spring 2008 when it was nearly $80/barrel higher in price.
b) Food price inflation and supply chain issues are forcing Americans to drive *more* because they need to access more shopping sites to obtain the items they need for daily living and to find the better price for those items. These are considerations that did not really exist in 2007/2008 – and may, in fact, suggest that oil/gas will exhibit even less price elasticity than in the past
c) Unlike 2007 and 2008 – Americans don’t really have the option of trading in existing vehicles for ones producing better mileage because of: a) Evolving consumer tastes from 2009-2019 did not really reward higher mileage vehicles b) Supply chain constraints have reduced overall vehicle availability and manufacturers are focusing on availability of their highest-margin vehicles (which, currently, are still not higher-mileage vehicles) c) New vehicle prices have risen dramatically – meaning fewer consumers can afford to purchase new vehicles at all.
Nothing but bad news, I’m afraid…
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