Any Economists here?

[Arde]

It looks like we can settle soon a fascinating question:
If the federal tax on gasoline is removed, how much cheaper would gas be?

The tax holiday will remove the 18 cent per gallon tax. Do you expect gas to reduce by:
a) more than 18c
b) exactly 18c
c) less than 18c
d) will not reduce the price at all

My thought experiment is as follows:
If the tax is added at the Point of Sale and does not affect the upstream oil extraction and refininig, then one would think the stations can just reduce their prices by 18c and nothing changes in their profitability. So that would be case b).

But if the demand is elastic, a reduction of the price would increase consumption which means that the reduction would be less than 18c, or option c).

However if production is roughly capacity limited, the customer is indifferent to whether those 18c go to gas stations, to the Federal Government, or to a charity. The price will convergence to the same value as before, or option d)

In short, I can only rule out that the reduction will exceed the tax component.

Willing to bet that c) happens. Willing to bet 18c on that.

 

[sfdon]

Aggregate demand increase is expected following tax cuts
Increased demand is linked to inflation.
Oh whoops.
Gas pricing has been seen as rather inelastic
(.3)- certainly in the short term.

C is my answer



UCI graduate in Economics

a long long time ago…

 

[Arde]

Two votes on c).
Just read an economist analysis assuming b), and that leads to a 6 dollar saving per month per adult in the US.
He used an average of one gallon per adult per day consumption, inelastic.

 

[Wes]

(E) price gouging will inevitably occur at each point on supply chain and cost will rise at the pump.

Not an economist but relevant career experience in public policy..

 

[Ohmess]

It is entirely possible that the costs to implement this "holiday" may exceed the foregone taxes, with the result that there will be no savings to the consumer.

The people who collect and remit gasoline taxes have never before had to implement this type of thing, and so have no processes for doing so.

They will need to create entirely new procedures to both begin and terminate the "holiday." These procedure will spin off entirely new records. In addition, these procedures will have to be documented and internal audit procedures will need to be created as well so as to ensure the procedures are properly implemented.

With a highly policiticized idea like this one, whoever is liable for these taxes will be pressured to begin implementation immediately, and will attempt to do so within the limitations of their existing financial systems so as to keep their costs to a minimum. They will make various assumptions about already taxed inventory, inbound product they own but have not yet paid taxes on, bulk sales between businesses, etc.

Alas, whatever assumptions they may make in seeking to map out new procedures they might seek to employ will have to be re-evauated when the IRS issues rules that (1) reject the simplest mechanisms that could be employed, and (2) requires things you never considered and don't know how to do. The IRS guidance will not arrive in a timely manner, but instead will arrive just as, or shortly after the "holiday" begins, thereby requiring a complete rework of the procedures just as the "holiday" is supposed to be implemented.

And there is another cost to consider. Those liable for the tax don't have staff sitting around waiting to implement the latest hairbrained idea from DC, so they will incur costs to manage the work the employees who are shifted over to new tax procedure creation had been hired to do.

The costs of doing all of this will show up in the price we pay at the pump. But wait, there's more. Taxpayers must also include an estimate of the costs to deal with the IRS audit of their implementation of the holiday. This too will increase the price we pay.

Consumers will expect a reduction of $.18, but that does not take into account implementation costs. And it is not price gouging for taxpayers to recover the costs imposed on them by these types of schemes.

These things are massively inefficient. They create huge predictable costs, for a benefit that is likely to be very modest, and that may turn out to be non-existent.

 

[Ohmess]

And before somebody chimes in and says "it can't be that hard", recall that some lucky accountant has to sign a return with the tax reduction on it, and must do so under penalty of perjury. In other words, some poor sap has to raise his hand and say this number is correct and if its not, I'm the guy who goes to jail.

 

[Dan Wood]

The oil companies are making record profits.
Five refineries have shut down in the United States in just the past two years, reducing the nation's refining capacity by about 5 percent and eliminating more than 1 million barrels of fuel per day from the market, leaving the remaining facilities straining to meet demand.

 

[dang]

It's politicians giving us our money back and patting themselves on the back. It doesn't matter what happens at the pump, the "tax holiday" will be brought up every chance it can with advertising, political debates, you name it. The only thing it's good for it political fodder.

 

[Ohmess]

The oil companies are making record profits.
Five refineries have shut down in the United States in just the past two years, reducing the nation's refining capacity by about 5 percent and eliminating more than 1 million barrels of fuel per day from the market, leaving the remaining facilities straining to meet demand.

These are two different things. Today's profits are a function of the fact that oil companies earn a percentage on the cost of oil, and subtract from that a relatively fixed amount of refining and distribution costs. Thus, when the cost of oil goes up, their percentage is applied to a larger base yielding a larger gross margin.

Furure investments depend not only on profits today, but also a predictable and friendly business climate. We in the West have cultivated a particular hostility to the oil and gas industry, and President Biden and his administration have taken concrete steps to make oil and gas operations in the US more complex and uncertain. In response to this oil companies are not investing.

 

[Dan Wood]

These are two different things. Today's profits are a function of the fact that oil companies earn a percentage on the cost of oil, and subtract from that a relatively fixed amount of refining and distribution costs. Thus, when the cost of oil goes up, their percentage is applied to a larger base yielding a larger gross margin.

Furure investments depend not only on profits today, but also a predictable and friendly business climate. We in the West have cultivated a particular hostility to the oil and gas industry, and President Biden and his administration have taken concrete steps to make oil and gas operations in the US more complex and uncertain. In response to this oil companies are not investing.

Chris
I don't disagree with what you are saying and I am not trying to make this political. The oil companies are on a slippery slope. The higher prices do result in their higher profits. However, it also justifies alternative energy such as electric cars. So their profits might be higher for a shorter term in lieu of lower prices making electric less of of an option.
I am not driving much since retirement and am looking for a new vehicle. I am on the edge if I want to go electric. Gas prices for regular seem to be going down (locally at $4.18) with the state gas tax suspended.
We should also look at how much federal subsides go to the oil companies.
Dan

 

[Ohmess]

Dan - Oil companies don't control the price of oil. There is a worldwide market for oil, and there are huge geo-political factors that come into play because of that.

We are being encouraged to think that oil and gas are going away as energy sources. I don't think the technology exists to make that happen, and as I have noted before, we cannot defend the US without oil. This is why, for example, General Curtis LeMay strongly encouraged the conversion of WWII military facilities to race tracks in the 1950s - to encourage the consumption of gasoline and therefore its production and distribution in the US.

Electric cars can work in areas with high population density and frequent short trips. If you make frequent longer trips to rural areas, or need to traverse rural areas to get to other densely populated areas, I don't think they make sense just yet. My own view is that we are trying to skip a step. Hybrids like the Prius and Chevy Volt seem like a better way to go rather than making leap straight to electric cars. Electric for the day to day, with an internal combustion engine backup for longer trips or when charging capacity is not available.

 

[sfdon]

Fun stuff here..

It is estimated that 83% of the U.S. population lives in urban areas, up from 64% in 1950. By 2050, 89% of the U.S. population and 68% of the world population is projected to live in urban areas.

 

[Dan Wood]

Dan - Oil companies don't control the price of oil. There is a worldwide market for oil, and there are huge geo-political factors that come into play because of that.

We are being encouraged to think that oil and gas are going away as energy sources. I don't think the technology exists to make that happen, and as I have noted before, we cannot defend the US without oil. This is why, for example, General Curtis LeMay strongly encouraged the conversion of WWII military facilities to race tracks in the 1950s - to encourage the consumption of gasoline and therefore its production and distribution in the US.

Electric cars can work in areas with high population density and frequent short trips. If you make frequent longer trips to rural areas, or need to traverse rural areas to get to other densely populated areas, I don't think they make sense just yet. My own view is that we are trying to skip a step. Hybrids like the Prius and Chevy Volt seem like a better way to go rather than making leap straight to electric cars. Electric for the day to day, with an internal combustion engine backup for longer trips or when charging capacity is not available.

Chris, Again you are correct and I agree oil will not go away. Hybrids are a great option. Oil prices have been this high before and the last time it was, gas was about $1.50 less. The oil company do control refining.

 

[Arde]

And while we wait for the winners of the quiz, the G-7 just created another fascinating experiment.
They plan a price cap for Russian oil sold to the non-embargo buyers, to be implemented by the insurers...
This limits the Russian windfall that is spent on the war. It subsidizes China (our top competitor) so that is that.

If the OPEC Saudi pricing to the West was 120$ per barrel before the cap, and the cap is say at 90$ a barrel from Russia to China and India, how much will the Saudi oil drop after the cap is in place (presumably reducing Saudi demand from China and India).

a) Will reduce to exactly 90$, the cap.
b) Will reduce by less than 30$.
c) Will reduce by more than 30$ (non-linear effects).
d) Will not reduce at all.
e) Will actually rise above the pre-cap price.

Hats off to anybody that gets both right.
My bet is d).

 

[craterface]

On July 11, 2008 oil peaked at $147 per barrel. Then the economy got soft. And American fracking came into its own and gave us a prolonged decrease in fuel prices. Obama got lucky that fracking technology came on strong during his terms.

Then Saudi Arabia and Russia worked to lower prices to drive high-cost North American producers out of business, and it worked to some extent.

Oil is a finite resource. Fracking can squeeze more oil out of the ground for a time, but as time goes by it becomes more expensive and difficult.

America needs to adapt to higher fuel prices. China sells more new cars than we do and their consumption will drive prices ever higher.

I just rented a Fiat Tipo wagon in Europe and got 48 mpg with reasonable performance. Fun to drive with a six speed. Meanwhile my employee here in the ole USA commutes alone in an F 250 4 x4. Yet complains about high fuel prices.

IMO the US and Europe should also buy discounted Russian crude if the Chinese are going to buy it anyway, but I would collude with the Chinese to drive the price down to 50 bucks a barrel.

 

[dang]

I just rented a Fiat Tipo wagon in Europe and got 48 mpg with reasonable performance. Fun to drive with a six speed. Meanwhile my employee here in the ole USA commutes alone in an F 250 4 x4. Yet complains about high fuel prices.

An older Mercedes G wagon fell in my lap last year and my wife has always lusted after one. I bought it, did a LOT of work on it and now it's on the road getting 11mpg. I just bought her an '05 Prius with 89k that I'll be fixing in the next few weeks. 50mpg. I haven't done the math to figure out how that will average out.

 

[Arde]

A clear dynamic at play has been that suppliers, knowing their oil is a limited resource, have a perverse incentive to create global instability and mayhem to capture a premium above the production cost pricing and competition. Iran and Venezuela have been playing that game forever, now Russia has perfected it with the Ukraine war.

Yes, fracking gave us some respite for a while based on pure technological prowess. I hope the new technological salvation is the move to a hydrogen economy, which in my opinion is about electricity for consumption, and hydrogen for storing and time shifting consumption from production, ideally from greener sources.

But we have to survive the short term, and maybe what is gong on will help us pull the band aid faster.

 

[mulberryworks]

Profit derived from instability and mayhem accurately describes the Texas power grid. It's designed to provide just enough power for normal conditions so when power falls short for various reasons, weather, maintenance, etc, surge pricing kicks in and can deliver an entire year's worth of profit in a few days. There seems to be little political effort to make changes as it's working as designed as far as the Governor, ERCOT (Electric Reliability Council of Texas) and the plant owners are concerned.
The power customers with freeze damage think otherwise.

 

[Dick Steinkamp]

What has changed recently is that now 40% of Texas' electricity is provided by renewables (solar and wind).

Wind and solar power are 'bailing out' Texas amid record heat and energy demand | CNN

Energy experts told CNN the Texas electric grid is holding up well this week in large part to strong performances from renewable energy.

www.cnn.com

I don't know how the greenies slipped this by the Governor, ERCOT and the plant owners, but the people of Texas are the beneficiaries.

I did Route 66 a month or so ago. Crossing the Texas panhandle it's lines and lines of windmills.

Pretty neat.

"...the price of wind and sunlight hasn't doubled in the past year like other resources".

 

[coupedegrace]

What has changed recently is that now 40% of Texas' electricity is provided by renewables (solar and wind).

I don't know how the greenies slipped this by the Governor, ERCOT and the plant owners, but the people of Texas are the beneficiaries.

The greenies were helped by T. Boone Pickens being a relatively early (2008) and very strong promoter of wind energy. This support by a legendary oil man and corporate raider lifted much of the green "stench" from renewables in Texas.

Don't forget that the Governor (falsely) claimed that the winter blackouts were due to the renewable energy in the grid, more specifically frozen wind turbines.