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Pump Price Politics
By Laura Knoy on Tuesday, May 2, 2006.
Gasoline prices have become the number one concern for Americans and for good reason, the cost to fill up at the pump is soaring and showing no signs of coming down anytime soon. That reality has lead politicians to point fingers and scramble for solutions, as the mid term elections draw near. We’ll look at the current state of gas prices and see how its fueling political debate. Laura's guests are Masood Samii, Professor and Chair of the International Business Department at Southern New Hampshire University and Former Chief Economist for OPEC from 1978-1987. Dean Spiliotes, Director of Research for the New Hampshire Institute of Politics at Saint Anselm College.
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Economics test for free market advocates:
Who pays the taxes on gasoline, the consumer or the producers when supply does not meet the demand?
That is a trick question as supply always meets demand, but for the current market, the issue is where do the supply and demand curves intersect, and they intersect at the price that limits demand to the available supply.
If the taxes were zeroed out, the price would drop, the consumers propensity to spend would increase and with it demand, so the demand would exceed the current available supply, so the suppliers would raise prices until the demand drops to the available supply. That price point is in the range of $3 a gallon.
If the current gas tax total of half a dollar were increased to a dollar, the first reaction of the gas companies would be to raise the price to $3.50, but the demand would drop enough that the gas stations would start accumulating more and more, so one, then another, would drop the price of gas until the demand equal the supply. We have already established that the price where we have equilibrium in demand and supply is at a price of $3. The result is that the suppliers are the ones that pay the tax, not the consumer.
I guess this isn't read by anyone working on the show, like Laura Knoy.
Twice Prof Sami answered as if price is not a factor in supply or demand. And twice that answer was unchallenged.
First, how can cutting the tax on gasoline increase the supply, and if the supply does not increase, then how can the demand go down, and if the demand does not go down, how can the price go down. Consumers are willing, or forced to demand as much gas as can be supplied at $3 a gallon, because only at that point do consumers find alternatives.
Second, the increased price has acted immediately to both cut demand and increase supply. Or rather it reflects the actions of consumers and suppliers. While suppliers have incurred increased costs as they shift oil and gas around the globe to ensure that they can meet demand everywhere, the price is set at the margin and most gas and oil reflects the increased cost, even if the cost has not increased for that oil and gas. And the way that the market decides to move the supply from one place to another is based on how much the demand drops in each market as a result of higher prices.
People in NH may not have drastically reduced their gasoline consumption, but they certainly have reduced it as a result of the higher gas prices. Maybe it is in making fewer Sunday drives or simply not running down to the store to get a snack, and maybe the demand only goes down by 0.1%, but that might be all that it takes to bring supply and demand into equilibrium. Of course, the poor are hit far harder and they may have cut their driving in half, walking or taking the bus or just not making the trip to the doctor.
In any case, if $3 gas didn't increase supply and didn't cut demand, then the price would go to $4 and then $5 and then $6 until demand dropped or supply increased, but the only way that price can increase in the short term is by moving gas and oil from other markets into the markets where the demand is outstripping supply.
Just some thoughts. Not in any particular order…
1. We are all interested in a simple solution where there is none.
2. Gasoline now costs more than it did. The price will continue to go up.
3. This is absolutely a market solution whether or not subsidies, etc. are in place; there likely needs to be incentive in place to get industry to develop alternative fuel sources—there are currently no real incentives to promote any sort of innovation.
4. At some point you will stop buying gasoline. At that point prices will stabilize or fall, depending on what gasoline is substituted for; oil companies don’t want that, hence no reasonable fuel substitute--yet.
5. The government can do very little besides mandate fuel economy standards, which the US auto industry laughs at, and dictate fuel blending standards. There is always the Arctic National Refuge I guess. Of course, even if projected oil reserves can be proven and extracted, US citizens would not likely see any of it in the lower 48 since it would likely be exported.
6. We use 20 million barrels of oil a day; 25% of the world’s consumption by 5% of the world’s population.
7. We have very little unused refinery capacity in the US currently. We have no plans to build additional refining capacity in the US currently. We will start importing more refined product (gasoline) from foreign countries. This, we will be told, will be the answer to all our prayers. So let me see if I understand this correctly: instead of transporting a relatively stabile product (crude oil) across the oceans by the millions of gallons, we are going to instead start transporting a highly volatile product (gasoline) across the oceans by the millions of gallons, into and out of ports. Can anyone say BOOM?
8. People tend to drive more if their vehicles get better fuel mileage
9. We are victims of an industry that runs the world; when we will we wake up? The people are the only ones who can force a change; our government is impotent and happy to be so. In all honesty, I am happy when they are impotent anyway. Do something for yourself; isn’t that supposed to be what we all cherish, what America stands for, add cliché infinitum?
10. Who do you want to control your life?
11. We are wasting money with congressional inquiries into why oil companies are profiting. The price of a barrel goes up, but some costs such as marketing, etc. stay the same, hence more profit. Do we really want an economy that tells companies how much money they can make? Don’t most people make as much as they possibly can? Is $0.07 on the dollar really gouging people?
12. MBTE is an additive to oxygenate fuel meant to help fuel burn more completely, improving air quality. Of course its residue ruins water quality. Why aren’t more people outraged? Ethanol, the byproduct of which is water and carbon dioxide, performs the same function as MBTE.
13. Ethanol is not a good substitute for petroleum; it is not nearly as energy dense, your vehicle would get fewer miles per gallon of ethanol than it does with gasoline, but ethanol should be part of the solution.
14. Any vehicle that burns gasoline, will burn a blend of gasoline and ethanol of up to 10%, with no modification. Wouldn’t a move toward making all gasoline 10% ethanol (E10) immediately reduce the demand for gasoline?
15. Suddenly GM is going green by thinking yellow, or something like that, yet they have had alternative fuel vehicles (AFV) since the 1990s. They have been used to play games with meeting fleet fuel economy standards. AND AFVs don’t just burn gasoline OR E85, the advertising message I get, they will burn ANY ratio of gasoline to ethanol UP TO 85% ethanol. Gee, I wonder who is promoting the use of E85? By the way, Ford and Chrysler have also been making alternative fuel vehicles since the 1990s. Try going to ask your local Ford dealer which models they are.
16. Biodiesel is nearly as energy dense as petroleum, making it a better substitute for fuel; it can be blended with petroleum diesel very easily; it can be blended and burned as heating oil; part of the solution
17. Wind and solar power, while great sources of electricity, have nothing to do with what people use to fuel their automobiles—unless we have a sudden influx of new better battery technology. Why does every discussion about what we burn in our cars confuse matters by talking about wind and solar power?
18. Let’s not even get started on the NIMBY maniacs of Nantucket. Suddenly concerned for the well being of wild life are they? I guess if Nantucket sound was miraculously relocated to a community will lower socioeconomic means, Cape Wind would already be pumping out oodles of pollution free, instantly renewable energy. Oh wait, where was the Seabrook Nuclear (pronounced newkuler if you prefer) power plant built?
19. Any real solution will be a blended solution; petroleum does not need to go away, its use needs to be minimized.
20. Consumers do not have a clear message of what is happening; we are currently looking at a US auto industry that is failing because they have focused on selling people big inefficient vehicles. Any effort to interest people in buying more efficient vehicles will likely be muted by that auto industry, lobbyists and politicians
21. Every time you see a Hummer (6-8 mpg @45 mph), honk, wave and grin. How much does it cost to fill a Hummer anyway?