The inconsistent US approach to high gas prices

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Americans are deeply unhappy with gas prices, and for good reason. Every fill-up gives consumers a sticker shock, and fuel prices drive up overall inflation both directly and indirectly, as $5 per gallon of gas increases the cost of carrying almost anything.

  • But the wave of frustration is creating inconsistent economic policy thinking in Washington, DC, and many state capitals.

Why is this important: The central problem is too much fuel demand and insufficient supply. But many of the policy ideas floated to deal with high gas prices don’t grapple with this fundamental disconnect and can be counterproductive.

Driving the news: The Biden administration this morning called for a three-month suspension of the federal gasoline tax of 18 cents per gallon and encouraged states to consider suspending their own gasoline taxes.

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State of play: The Americans take to the road. Refining capacity is down 5.4% since 2019.

  • This mismatch is the problem. Refineries are almost at capacity, which means that it will be difficult to produce much more gasoline in the short term.
  • High prices are essentially how finite supplies are rationed. The alternative is artificially low prices, combined with shortages.

So to get to underlying problem, a policy should either reduce demand or increase supply. Many approaches being discussed do not.

What they say : The gas tax exemption proposed by President Biden would have limited benefits, say analysts from all ideological backgrounds. “The substantive case for the policy is weaker than ever,” Tobin Marcus, strategist at Evercore ISI, said in a research note.

  • “Subsidizing demand in a supply crisis would be counterproductive, the magnitude of the tax cut relative to prices at the pump is marginal, and high refinery utilization means that a greater portion of the benefits would be captured by producers rather than consumers.
  • Marcus, as it happens, was a political adviser to Biden when he was vice president.
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There are similar issues with other political ideas. California Governor Gavin Newsom is advocating a $400 per-vehicle gas tax rebate to help bring down higher prices — but that would mean higher demand, not less.

On the supply side, some congressional Democrats have advocated a “windfall tax” for energy companies. But if passed, a policy like this could make companies more reluctant to invest in more energy exploration.

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What could work better? On the supply side, Employ America has produced a creative, if legally dubious, proposal for the Treasury to use the “Exchange Stabilization Fund” to incentivize energy producers to increase production.

  • On the demand side, offering subsidies for public transit — or other more fuel-efficient means of transportation — could help reduce the demand for gasoline.

The bottom line: Weighing policies aimed at lowering gas prices, return to Economics 101 and consider exactly how they might help balance supply and demand — or hurt.

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