PUBLIC POLICY AND GAS PRICES

Sure, it sounds like a wonderful idea, Gregg, just raise the gas tax and reduce gasoline consumption, traffic congestion and environmental degradation! This article provides a few key lessons in public policy decision-making problems. Gregg insists that the country would be better off today if we had adopted a 50 cent per gallon tax that Kerry supported in 1994. Problem one: how do you measure "better off" and, more importantly, better off for whom? (He also admits that those industries affected by changes in demand for gas might be adversely impacted, but oh well!). Next, Gregg makes a flurry of wild, unsubstantiated claims about how world oil prices would now be lower, Persian Gulf states would have less of an influence on U.S. policies, global warming would be less of a threat, etc. Problem two: Proving such claims. Just because you jack up the gas prices, the rest do not necessarily follow.

At this point, Gregg asks the reader, "Don't all those things sound pretty good?" Quite frankly, Gregg, you sound like a jerk. But let's move on. He tries to pass this one off on the reader: "Ideally, proceeds from a revenue-neutral gasoline tax could be used to reduce income taxes and payroll taxes of the poor and lower middle class."

What does revenue-neutral mean? And what's so great about creating a tax on a consumption good, which means regressive taxation on the less fortunate members of society? Problem three: bad economic reasoning used to justify a public policy idea. We've tackled the economics of a general gas sales tax here before. In short, a sales tax does not simply mean the consumer pays 50 cents on top of the market price of gas at the pump. We trace out a summary of what is not seen in that previous post. There is nothing "neutral" about the tax. Ultimately, the tax is "paid" through the income of gasoline producers.

His last resort: telling us Greg Mankiw supported the policy. Who cares?

UPDATE: See also this previous post on Easterbrook.Calling Cards

A GAS TAX

In response to a comment here on a gas tax, a reader writes:

Let me get this straight: if I am paying $2.25 per gallon at the pump, I am nevertheless going to be happy with Kerry for cutting gas costs .20 before increasing the tax by .50? Entitled to your opinion, but I can't see that I would care what percentage of my $2.25 goes to taxes versus the cost of the gas itself.

The short answer: My point was that even if Kerry raises the gas tax $.30, this does not necessarily mean we will see a higher market price for gas. The long answer: If you are paying $2.25/gallon for gas and John Kerry decides to slap on a $.30 tax to fund the war effort, the producer can't simply charge $2.55 for gas and pass the tax forward to the consumer. Instead, the tax is shifted backward to the line of production, where firms on the margin in the industry will have to add the tax to costs add/or be driven out of the industry. This reduction in stock will tend to raise the selling price (regardless of the elasticity of demand) of the final product, gas, for consumers. Ultimately, it is the market price that determines the cost of production. It is impossible to say, then, that portion a) goes to the "cost" of gas and portion b) goes to the tax. In addition to the tax, other regulations also tend to reduce to stock of production goods available. While, of course, an increase in the tax, would tend to raise the price of gas compared to what it would otherwise be, the market price of gasoline could still actually fall! My problem was with blaming higher gas prices on Kerry as a political ploy. It simply cannot be proven. House review outdoors

I HEARD ON THE NEWS LAST EVENING

that the State of Hawaii is instituting price controls on gasoline. The newscaster actually said: "We look forward to seeing how this works." I'll tell you how it will work: there will be less gas available in Hawaii than there otherwise would be. It's a good thing our central planners here in the U.S. can crank open the reserves and flood the market. Who said socialism was a failed experiment? The Soviets just didn't have the right leader: George W. Bush.

Of course, leave it up to a nutball conservative to blame the rise in oil prices on John Kerry. Here's another lesson in basic economics: a producer can't pass the tax forward to the consumer by tacking it on to the prevailing market price. I suppose he is right that government actions reduce the supply of oil compared to what it otherwise would be. Still, you can't prove this is behind the rise in oil prices. A huge increase in demand for oil also puts upward pressure on the world price.

The trio have one thing in common -- their production is not growing. PetroChina and Sinopec's oil and gas production were virtually flat, while CNOOC's output growth of 2.9 percent was below expectations.

Half of PetroChina's crude output comes from the Daqing oil field in northeast China, where output has been sagging. Sinopec's Shandong-based Shengli oilfield, which accounted for most of its crude output, is also getting depleted.

PetroChina's upstream capex rose 16 percent to 59 billion yuan last year, but its output grew just 2.2 percent. Mirroring the difficulty of finding oil in China, PetroChina's total oil and gas reserves rose just 7.9 percent to 17.8 billion BOEs at the end of 2003, 40 percent of which is gas.

PetroChina plans capex of 17.4 billion yuan on gas this year, up from 13.5 billion yuan in 2003. The main project is the mega West-to-East pipeline, which is expected to pump 12 billion cubic metres a year by 2007.

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