Three Presidential Candidates, Three Weird Approaches to Economic Policy
By blackhedd Posted in demagogy | Economy | Gasoline-tax | Refinery capacity — Comments (42) / Email this page » / Leave a comment »
I’m going to let you in on a secret you may not have heard yet: The price of gasoline has been rising.
And since it’s a Presidential election, this is populist gold. Each of the candidates has proposed something to do about it. Of course, the high price of fuel is a complex phenomenon with a lot of causes, very few of which are responsive to policy. So the candidates are stuck talking about the thing that government actually can affect: the level of Federal taxation.
Their responses are distinct, and illuminating.
Let’s start with Senator McCain, who kicked off the gas-tax derby a few weeks ago in Pittsburgh, with his proposal for a Federal gas-tax “holiday” over the summer months. Sounds great, feels good, doesn’t do a whole lot of anything permanent, and certainly does nothing to alter the underlying market dynamics.
Senator Clinton’s response? She thought it was a great idea, just what the bitter, gun-toting, Bible-thumping, pickup-truck-driving rubes who are now her base constituency wanted to hear.
But of course, she pointed out that Senator McCain wasn’t planning to “pay for” his summer gas-tax holiday. What was her solution? Right you are. Install a “windfall profits” tax and take it out of the hides of the hated, evil oil companies.
Now if you’re a shareholder of an integrated major oil company (and if you have any kind of stock mutual fund or pension plan, you are one), your immediate response will be ”WHAT windfall profits?” Just this week, Exxon-Mobil announced an ugly first-quarter report in which their revenues and earnings from operations fell below expectations, and below the levels of a year ago.
Exxon-Mobil and the other majors make a lot of extra money from the fact that they own and produce crude oil. But their daily production is falling as they fail to replace their reserves. And their refining and marketing businesses (the ones that turn crude oil into gasoline and distillates) are absolutely getting slaughtered.
Why the heck is that? Well, ask yourself how much you pay for gasoline compared to a year ago. Perhaps 20% more. (A national average of about $3.60 versus $3 or so early in 2007.) But in that time the price of crude oil has gone up more than 100%. The difference reflects the inability of oil refiners to pass their increased crude-oil costs on to gasoline consumers. The difference comes out of their hides. (Well, their shareholders’ hides.)
Senator Clinton, God bless her, is as innocent of economics as she is of the finer points of cattle-futures trading and baking cookies. She wants to make the oil-company investments in your 401(k) plan even less valuable than they are now.
And what of Senator Obama? Even more interesting. He says the tax-holiday idea is just a Shell game. Ba-DUM-pum. (Royal Dutch Shell is not an American company, Senator. It’s British and Dutch.)
What’s Obama’s reason not to cut gas taxes? He says, with a straight face, mind you, that the move will destroy construction jobs.
Say, WHAT? But he said it: 6000 jobs lost in Indiana, and 7000 in North Carolina. One presumes that construction workers in states without impending primary elections are safe.
What is the Senator thinking? Well, what’s the fig leaf that furnishes the reason for a Federal gas tax in the first place? Right. The taxes theoretically fund Federal highway construction projects.
In the first place, you won’t easily convince me that the government can more efficiently build transportation infrastructure than anyone else. That’s axiomatic. Of more direct relevance, who honestly believes the Federal DOT will actually throw people out of work? You and I both know (as does Senator McCain) that the revenue shortfall from a gas-tax holiday will come from exactly where it always does: the Treasury will borrow it.
So Senator Obama doesn’t know what he’s talking about, but that’s not news. More importantly, his response reveals yet again his hard-wired instinct to protect government spending programs at our expense. Keep that in mind as you think about what his Presidency would be like: he’s a standard-issue tax-and-spend liberal, just like McGovern and Dukakis.
What the Numbers Say
I haven’t found any mention of exactly what kind of numbers we’re talking about here, so I got out the back of an envelope and started figuring. My envelope says that federal gas-tax revenue is about $2.5 billion a month, give or take. (In the summertime, it would be somewhat more.)
Over three months, it’s a drop in the bucket. The whole issue really is just political theater.
Let me make a few additional points about gasoline prices and taxes. Over the course of a year, the federal gasoline tax comes out to $30 billion or so (by my rough calculation), which is not a small number. This tax actually is an important one, because, like the payroll tax, it’s regressive. That means it’s relatively bearable, and not large enough to affect marginal behavior.
The Democrats will find, if they increase their power this fall, that cutting taxes on the less-wealthy yields little economic benefit. Raising taxes on the wealthy, on the other hand, is economically destructive, because it does affect marginal behavior. Economic populism is ultimately self-defeating.
About Refinery Capacity
Some people have correctly commented that a gas-tax holiday will not result in a noticeable reduction of retail fuel prices. (Many people expect, of course, that prices would fall exactly 18.2 cents a gallon.)
But remember the refiners and marketers of gasoline, whose profits are under siege. They will do exactly what the free market prompts them to do: leave prices where they are and put the extra 18 cents a gallon in their own pockets.
Keep in mind that crude oil and refined products are two completely different markets. I’ve already told you a lot in previous posts about why crude oil is behaving as it is.
But unlike crude oil, gasoline and distillate prices are rising at least partly because of supply constraints. You’ve heard a lot of people say this:
If we could only build some new refineries, we’d have more gasoline, and prices would fall.
Maybe. But I have two responses: First, why on earth is the construction of refining capacity a policy decision made by the government? Shouldn’t it be a business decision made by private investors? Oh right, I forgot, the EPA has a veto over private construction.
Second: remember what I said above about the relative profitability of refined products versus crude oil (what oilers call the “crack spread”). Any businessman who seriously considers constructing a new oil refinery should be tested for brain cancer.
Even if we repealed all the environmental regulations and pre-empted all of the NIMBY lawsuits, you won’t see anyone building a new oil refinery anywhere in this country for years to come, and probably never again.
That’s because it makes no business sense to do so.