Don’t bother with gas prices
Published 5:26 pm Sunday, May 4, 2008
With all the talk of the experience and qualifications of the three remaining major-party presidential candidates, I have a question: Did any of them take Economics 101 in college?
One would think U.S. senators would have a basic understanding of supply-and-demand, but I’m not yet convinced. Just take a look at their proposals to bring down soaring gas prices.
Hillary Clinton and John McCain have both proposed a summer “gas-tax” holiday, suspending the 18-cent federal gas tax during the summer months.
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Basic economics teaches that three things can cause the price of goods to decrease: increased supply, lowered cost of production, and decreased demand.
A gas-tax holiday would accomplish exactly none of those things. Worse, it might actually increase the price of gas.
Lowering the price of gas by suspending the price of a gallon would increase demand, because gas would then be cheaper, and those summer holidays might look a little more feasible with gas at $3.42 instead of $2.60 (the national average). But as soon as demand increases because you, your neighbors and everyone else feels the urge to drive up to the Brainerd Lakes Area, the price of gas will then increase again, unless more supply is made available. So that artificial (because it’s caused by government action instead of the free market) drop in gas has a good chance of popping right back up to $3.60 — not a pleasant surprise on the Fourth of July when you’re in Brainerd and have to get back to Austin.
Meanwhile, since the government is no longer collecting gas taxes, the fund to pay for roads and bridges loses revenue.
Sen. Barack Obama, who called Clinton and McCain’s proposals “pandering” — which I happen to agree with — has opted to point a finger at oil companies instead of the federal government. Obama is using Americans’ frustrations over $3.60 to rail against “price gouging” by oil companies.
Price gouging? The American Heritage Dictionary offers two related definitions of gouge: to extort; and to swindle. And to “extort” is “to obtain from by coercion or intimidation.” No oil companies are forcing anyone to buy gas; and no oil-mob goons have showed up at my door reminding me that I haven’t filled up in a week.
Obama’s words indicate that he believes the government should do something about exorbitant profits by oil companies, something that to anyone who believes in free markets is ridiculous. Oil companies report record profits because of record demand; in reality, their profit margins are half of what technology companies report and — believe it or not — smaller than the vast majorities of newspapers, too.
Oil companies have to make a profit, otherwise there’s no incentive to keep producing the fuel we need. The profit margins are what are expected by their investors. If profit margins shrink, so do stock prices — stock that is owned by a lot of 401(k)s. Indeed, 51.6 percent of Exxon Mobil stock, for example, is under “institutional ownership,” owned by companies like Barclays, Vanguard, Fidelity, T. Rowe Price, etc. If any of those names look familiar, it may be because they’re in your 401(k) program.
In other words, if oil company profits fall, their stock likely will, as well, which in turn could hurt your retirement savings.
Thankfully, Obama’s other proposals are better. Like his fellow candidates, he has proposed pushing for more fuel-efficient vehicles. That would reduce the demand for gas.
Unfortunately, we can all personally buy more fuel-efficient vehicles, and auto-makers will continue to work on increasing the efficiency of their fleets, but don’t expect that alone to have more than a nominal impact on fuel prices. Rising demand isn’t just occuring in the U.S. — the real culprit is rising demand for cars in China in India. The desire to have multiple cars for every family in the U.S. that came into fashion a few decades ago is now happening in those countries, and it’s not just a small jump — it’s two billion people who have until now walked and ridden their bikes everywhere buying up small and cheap cars to crowd their streets.