Why I Oppose a Gas Tax Holiday
Reluctantly I oppose a gas tax holiday. The problem of high prices is the result of demand for gasoline exceeding the supply. It’s not “inflation,” it’s supply and demand, not that it will stop the fake “free market” clowns in God’s Own Party from screaming inflation.
Multiple things are taking place at the same time. The vicious attacks on Ukraine cut off a lot of Ukrainian and Russian oil from markets. But the market for unrefined oil and the gasoline market, while related, are different things. You can have a surplus of oil—meaning lower prices there—and have a shortage of gasoline—meaning higher prices for gas—at the same time.
The U.S. Bureau of Labor Statistics reported in 2020 that the world experienced a boom in oil production but a dramatic decline in demand. “The production boom coincided with an International Energy Agency (IEA) estimate that global demand for oil was down by almost 30 million barrels per day because of the shutdowns in response to the COVID-19 pandemic. With demand down, the addition of petroleum to an already saturated market led to a near-record level of 535.2 million barrels of crude petroleum stockpiles in the United States on May 1.”
In the U.S. one major problem is our capacity to refine oil into gasoline declined during 2020 and 2021. The pandemic surpressed demand. Now that everyone is pretending the pandemic is over demand has surged but refinery capacity has not. Demand can surge overnight but the refined supply moves at a far slower rate. A huge surge one week in demand will have no immediate impact on the supply coming out of refineries. Refining is slower than the market due to technological, political, and legal restraints.
During the pandemic demand was low enough refineries were unprofitable to keep open. That meant they were destroying wealth not enhancing it. A refinery in St. James, LA was closed in 2020 after it “became unprofitable as COVID-19 spread across the United States.” “Marathon Petroleum said in August 2020 that it would permanently close two refineries in Martinez, California, and Gallup, N.M. in response to lower fuels demand, after idling the facilities following COVID-19 outbreaks in the United States.”
Closing a refinery is quick, reopening it another matter entirely. In 2020 the US capacity to refine oil dropped by 800,000 barrels per day (bpd) and then dropped by another 125,790 bpd in 2021.
The pandemic was destructive to oil refineries but it wasn’t alone. Hurricane Ida imposed extensive damage on a 255,6000 bpd refinery in Louisiana last year. It’s still being repaired after massive flooding.
The price of oil has little to do with the price of gasoline contrary to Republican rhetoric or the bogus “free market” rants of some libertarians. It’s basic supply and demand. The supply of gasoline is much lower than the demand, and it’s low regardless of oil prices. The oil can’t be refined for use until more refineries are brought on line.
During the pandemic refineries closed and workers who knew these jobs moved on to other professions or even other regions of the country. Getting them all back or rehiring new workers and training them is a longer process than just opening after a one day holiday.
The price of gasoline is high because demand, relative to supply, is high. Higher demand is pushing up prices because of a shortage of gasoline. Lowering the price of gasoline when it’s in short supply only makes the shortage more profound by increasing demand.
The solution is not lower prices first, but higher refinery capacity. We need to increase the supply of gasoline, which will naturally lower the price of gasoline. Lowering the price, without increasing the supply, is putting the cart before the horse and that doesn’t work.What economics 101 tells us is increasing demand, without increasing supply, will only push up prices, which is the complete opposite of what needs to be done.
The White House seems intent on solutions that won’t work. One is they want a gas tax holiday, thus lowering the price and increasing demand, but doing nothing for the supply of gasoline. The other measures—such as releasing oil from the strategic petroleum reserve—will only increase the supply of oil but do nothing to increase the supply of gasoline. Lowering oil prices, when refined gasoline is in short supply, will not lower the price of gas. For instance, price controls will only cause demand to exceed supply and create shortages and gas lines followed by rationing—ask Jimmy Carter how that worked!
At its core this isn’t an issue of inflation, in spite of Trump’s massive increase in the money supply. It’s an issue of supply and demand: demand surged as supplies declined. To the degree the higher prices reduce demand they are helping solve the problem for the same reason the tax holiday will exacerbate it. There are two solutions. The short-term solution is to reduce demand which higher prices tends to do. The second is a long-term solution and that’s increasing the ability to refine oil. That will anger a lot special interest groups who have put political roadblocks in the path every chance they got. That means a lot of people will have to reconsider their political priorities.
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