Tuesday, May 02, 2006

On April 27, 2006 I wrote a post on the high price of gasoline.  The conclusion of that article was that a “windfall profit” could not realistically be determined.  Oil companies may very well be receiving the economically relevant profit for the oil they sell based upon supply and demand principles.  

Of course, the “windfall profit tax” is not the only “solution” being proposed.  According to news reports, members of Congress are also proposing to remove the federal gasoline tax ($.184 per gallon) for a temporary period of time and/or give a $100 rebate to taxpayers.  Representatives from Illinois are proposing a temporary end to the Illinois sales tax on gasoline which is 6.25% including the local portion of the tax.

Economically, what will be the result of these proposals?  The “windfall profits tax” is intended to shift some income from the various companies involved in oil to the government.  What the government will do with the additional taxes has not yet been worked out.  Economically, I doubt that any government conceived “windfall profits tax” will be beneficial.  As I stated in the April 27th post, I don’t think an agreement can be reached as to the amount of any “windfall profit” nor economically should there be a “windfall profit tax”.      

The temporary removing of taxes may have the unintended consequence of actually increasing the price for gasoline.  If the price is lower, the demand may well increase.  Increasing demand without a subsequent increase in supply usually leads to HIGHER prices.  The end result may mean the actual price is similar to the present price with the government receiving less tax revenue.  If the $100 rebate is used to purchase gasoline and therefore increasing demand, the price will not be significantly changed or will continue to increase.  The government will just be giving consumers addition income to demand more gasoline.  

Economically, only three things will lower gasoline prices.  Decreased demand, increased supply, or a combination of decreased demand and increased supply.  If you want lower prices, buy less gasoline.  That means driving less, not buying SUV’s and other vehicles that provide low gasoline mileage, finding and using alternative means of transportation, and developing and using alternative fuels among other approaches.

Unfortunately, these alternatives take time to occur.  Unfortunately, we knew there was a major problem since at least the 1970’s when consumers were waiting in line for hours for gasoline.  Unfortunately, we basically ignored solutions once the crisis subsided.  Unfortunately, the demand for gasoline is far greater worldwide now than it was then giving our actions less of an impact worldwide.  Unfortunately, instead of demanding fuel efficient vehicles, we demanded SUV’s.  Unfortunately, we need the will to make major changes over a long period of time and we have not demonstrated an ability to get past our momentary, perceived selfish interests.

I heard this last week and I don’t remember the source.  Supposedly, a representative of an oil producing nation told an U.S. representative that if the U.S. begins programs to shift our dependence on oil, the oil producing countries would simply lower prices.

What would be the result?  The implication seemed to be that the oil producing countries know that lowering the price would basically stop our drive to find and use alternatives to oil.  Why would he believe this?  Because that was exactly what happened after the crisis of the 1970’s.  After the crisis was perceived to be over, we stopped pushing for solutions.  The result?  We are more dependent upon oil today than we were then!    

It’s time we took responsibility for our actions.  It’s time to end our five second attention span.  It’s time to start making sacrifices for the good of the nation and the economy.  It’s time to pay attention and benefit from the “laws of supply and demand”.  It’s time to allow the pain of high prices to change our collective behavior.

If not, we will get pass this.  Price will eventually be lower. And we will probably go through this for a third, fourth, fifth time until we finally start changing our demand and supply behavior.  There are only three choices—change now, change later after more pain, or don’t change and go through this again and again.  It will not be the politicians; it will be our fault.  We ultimately as consumers determine supply and demand!    


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