Free-Market Capitalism

23 June 2022


Cogito Ergo Non Serviam

Gas Tax Holiday is a Mere Gimmick


The Biden administration is in office at a time of high inflation and high gas prices. As a result, the electorate (an economically illiterate bunch) has a low opinion of him and his team. To salvage themselves politically, the need to do something about prices. More accurately, they must be seen to act whether the prices fall or not. So, the idea of a 3-month federal gasoline tax holiday (a saving of 18 cents per gallon) is the policy flavor of the week. Congress is already lining up to kill the idea off. That is the best possible outcome for the administration.

The arithmetic is telling. With a gallon of gas at around $5, an 18 cent reduction is really a discount of 3.6%. Most people will not even notice it presuming first that the holiday law passes Congress and second that the oil companies pass the full 18 cents onto the consumer. Most people in a store are not impressed by a 10% discount. What the American people want is gas back down where it was a decade or two ago. That is not going to happen because oil prices are globally determined by the market.

The conditions of a year or two ago drove prices for petroleum down. Economic activity had to halt to save lived during the phase of the pandemic where there was no vaccine. In April 2020, West Texas Intermediate Crude fell below $0 a barrel. That is not a typographical error. Zero dollars was more than a barrel of WTI was worth.

Now, Covid is endemic and most have had their shots and driving to work has become possible again. People can take road trips and drive to the mall again. Demand shot back up. Supply lagged. Then, the Russian military entered Ukraine, and economic sanctions affected the oil industry. Russian oil was banned from most of the global market. So, demand soared at about the same time supply dipped. Free market capitalism says prices will rise when that happens.

Increasing supply will cause prices to fall, as will lessened demand. That is the mechanism of the market, and it is wonderfully effective in rationing goods and services that are in limited supply. No one likes to call it rationing, but that is what it is. The market works better than any other system designed to do this rationing.

Where the US national interest lies, however, is in a continued high price for oil and gasoline. As prices rise, consumers look for alternatives. If they can\'t afford butter, they switch to margarine. The US has had an oil addiction for decades that allows unpleasant characters like Mohammed bin Salman in Saudi Arabia or Vladimir Putin in Russia to harm the US economy. Leaving prices high will force changes to the energy sector faster than if prices for oil and gas were lower.

Switching to renewable power is inevitable. When one can generate electricity from solar, tidal, hydro and wind, the cost of inputs is nil. Construction and maintenance are all that is necessary. That is inherently cheaper than spending on construction, maintenance and fuel. Moreover, these energy sources are not subject to foreign tampering. In addition, these sources encourage a decentralized power grid that makes it less susceptible to terrorism and cyber-attacks. In short, it is inevitable, and it is in the national interests of the US.

Thus, the Biden administration is set to introduce legislation that will not pass and that if passed would have minimal effect. By offering it, it shows he dues understand how Americans are feeling, and that is never bad for a politician. By having it fail, he can attack the Republicans, who will have rejected a tax cut. And prices remain high to discourage use of oil.

© Copyright 2022 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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