McCain & Clinton Fail Economics 101

I don’t know why, but I always seem to be surprised by the pandering of politicians. I guess that makes me somewhat naive.

The latest bit of idiocy from two of the three candidates for the highest office in the land was a suggestion that federal gasoline taxes — 18.4 cents a gallon — be suspended from Memorial Day to Labor Day. To his credit, Barack Obama dismissed this as counter-productive gimmick.  I don’t have a horse in this race, but I am heartened to see at least one candidate is not clueless. (Note: Please don’t email me saying why I should support this idiot over that one; I am not rooting for any of them — although if this keeps up, I may shift from the neutral column).

A quick lesson in Supply & Demand 101 for the Maverick McSame and Yoko: Strong demand and limited supply of a product lead to price increases. If you artificially lower the price of something — i.e., waive taxes for a period of time — all you will have accomplished was stimulating more demand. The higher demand and increased consumption eventually lead to even higher prices.

Hence, the expression the cure for high prices is high prices.

Put this plan into effect and long before summer’s end, gasoline prices would have risen to the pre-tax holiday levels. Then, we slap that tax back on, and the electorate is pissed at you. Then, neither of you gets elected. Not only bad economics, but bad politics.

We have no energy policy, and none on the horizon. Candidates serious about the issue of high energy prices should be discussing increased CAFE standards, capital gains tax waivers for alternative energy investments, greater offshore drilling, Pigou taxes, rapid nuclear plant approvals, a huge increase in the basic R&D the government does on energy — a Manhattan project for energy and transportation science.

Instead, we hear proposals about waiving an 18 cent tax.

~~~

On a related but very different issue, if any of the campaigns wants some free advice as to a major theme/issue no one has tapped into yet, give me a call. Hint: It has to do with reality. It probably works best for the Obama campaign (a blue collar issue that will help him with the elitist charges) but I could not care less who pushes it — only that it gets pushed. (Longtime BP readers should be able to figure it out).

The caveat: I know nothing about politics, but a little something about data analysis, markets and the economy.

>

20080429_oil_graphic

courtesy of NYT

>

See also:

Oil Price Rise Fails to Open Tap      
JAD MOUAWAD
NYT, April 29, 2008      
http://www.nytimes.com/2008/04/29/business/worldbusiness/29oil.html

Tax cut could push gas prices higher
Steve Hargreaves, CNNMoney.com staff writer
CNN Money April 29, 2008: 11:59 AM EDT
http://money.cnn.com/2008/04/29/news/economy/gastax_cut/index.htm

Dumb as We Wanna Be
THOMAS L. FRIEDMAN
NYT, April 30, 2008
http://www.nytimes.com/2008/04/30/opinion/30friedman.html

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What's been said:

Discussions found on the web:
  1. Steve Barry commented on May 1

    When I was a kid, I saw gas rationing and lines around the block for gas. They implemented MPG standards for cars that would rise through the years. It actually worked well for awhile. Then some politician (correct me if I wrong, but I think this was all under Clinton) decided an SUV was not a car, but a truck and was thus exempt. This was the single biggest blunder in the history of energy policy. SUV sales boomed, MPG standards were basically out the window and this country is now addicted to gas guzzling vehicles. Furthermore, Detroit was pummelled by foreign SUV makers.

  2. John F. commented on May 1

    One point not often mentioned in the media, but well known to the research community, is that Congress’ failure to pass a budget means a number of approved peer-reviewed basic research projects funded by the Department of Energy are on hold. Obstacles to resolution have been disputes over pork, subsidies, and earmarks. We need to clean house (and senate) before giving them more money to fuck around with.

  3. Mr. Flibble commented on May 1

    Even more vexing about this temporary tax waiver is that even if it worked as intended it would save the average family chump change. And that’s assuming there’s no price increases to absorb the higher demand.

    More evidence that our would-be leaders just. don’t. get. it.

    We are ruled by monkeys.

  4. cinefoz commented on May 1

    Surprise! McCain and GWB make these statements because there is a sizable group who will believe it. People will always prefer being told there is a pot of gold at the end of a rainbow over being told the truth. Especially if effort or education is required. The average person is gullible to an astounding and unbelievable degree. Especially if they are told gains without effort are possible if you just know ‘my’ secret.

    I bet the stock market goes up today and I bet hucksters will show up on CNBC proclaiming it is safe to buy because the ‘market is discounting the future’. Has anyone noticed that the people who say ‘Buy Buy Buy’ never bring up topics such as higher prices for basic living expenses, the falling dollar, or the like (unless the product they are selling is fear based).

    T doubt this market will be like the one in mid 2006 where it just kept going up. Nothing is powering it today except dreams. I think it is about to set a new trading range based on lowered expectations. What I don’t know if today’s values are the new top, or if the new range will be set significantly lower than today.

    Anyway, I’m 100% certain that my next buy in point will be well below my sale point of a couple of weeks ago. Next time I won’t underestimate the stupidity of the masses, and will wait a few more days before cashing out. I would have goosed my profit by maybe 3 or 4%.

    What I’m unsure about is where to put my cash next time. I prefer sectors and logical groupings over individual stocks. I can’t read where the opportunities will be in a stagnant economy. Or should I just put money where the gullible will go after they feel it is safe to jump back in, somewhere in the top half of the next run-up?

    Any suggestions?

  5. zackattack commented on May 1

    It’s because they view high prices as a temporary situation. They fail, wittingly or unwittingly, to grasp peak oil.

  6. CaptiousNut commented on May 1

    C’mon Barry.

    Pigou taxes? All higher gas taxes deliver are smaller cars. Look at Europe.

    ~~~

    : Nothing is off the table . . .

  7. Steve Barry commented on May 1

    There is no free lunch…even if this lower gas taxes scheme worked, the government will print more money to make up the downfall in tax receipts, thus weakening the dollar and causing gas to rise!

    There are no easy solutions for a debt burdened nation facing a housing bubble greater than the depression.

  8. DMR commented on May 1

    CaptiousNut:

    The only solution for reducing oil consumption for transportation is smaller cars! All other solutions ultimately depend on a perpetual motion machine at their core and will fail. There is only so much that efficiency will buy us.

  9. D. commented on May 1

    What’s been worrying me in the last few years is how most people are convinced our regulators have much better tools and will never make the same mistakes as those made during the depression.

    Meanwhile, one by one, the same mistakes are creeping up.

    The Glass Steagall Act was created during the great depression to control speculation. As more and more people forgot the past, it got repealed.

    Now the only weapon missing in the banks arsenal is insurance. Hitory repating iteself all over again?

    What about creeping protectionnism? What about dumping (pork)? Those were flagrant throughout the 30s.

    In Canada, mortgages can’t be locked in for the long term. 5 years is the norm so if rates move up, homeowners will suffer. Every time a friend takes on a huge mortgage, I ask how they could not worry about future rates. The answer is always that rates can’t go up or they’ll create a recession. As if that stopped them in the 70s and 80s! They seem to forgert that Canada is a taker of rates, not a maker.

    One of the biggest risks today is oblivion.

  10. dark1p commented on May 1

    1) That prices would rise over the summer sans tax, creating a jolt when the tax is added back on, is not a given. It’s speculation.

    2) If crude hasn’t reached a multi-month top, it’s about to. Before the end of the year, we will see $85/bbl. Study the charts.

    3) Isn’t it nice that people like us can consider 20 or 25 bucks a week ‘chump change’? There are millions of people in this country who would love to save that much money, if only to enjoy the summer just a little more with their families. It’s a temporary reprieve for them. And sorry, it’s not ‘chump change’.

    We are too privileged and living on the coasts too long. There’s a lot going on in the rest of the country that we should maybe start getting a feel for.

    Just sayin’.

  11. ECONOMISTA NON GRATA commented on May 1

    Barry:

    You say: “Hint: It has to do with reality.”

    Please….. Throw me a bone here…. Come on dude…. It has to do with reality….? and… We’re talking about McSame and Yoko (good one)….? BRO….!

    Best regards,

    Econolicious

  12. julie commented on May 1

    We have been discussing the gas tax cut proposal in AP Microeconomics. High School economics students have made your points in their classroom.

    Seems the candidates ( except for Obama) need to become economically literate.

  13. Steve in TN commented on May 1

    Cinefoz,
    As far as what sectors to be buying; why not get an introductory subscription to NoLoad FundX and concentrate only on the recommended ETFs (sectors). I’ve been subscribing for years, they’re rated at the very top of Hulbert’s rankings. They use a mathematical momentum approach that works 98% of the time. It has changed my life.

    As far as the gas tax goes; a poll I read a few days ago on an auto enthusiast site (Autoblog) showed support for a gasoline tax to cut consumption was favored 4 to 1 by those that voted. Obviously, the politicians are behind the curve. They’re so frightened of voter reaction.

  14. cinefoz commented on May 1

    dark1p:

    18 cents a gallon is $1.80 a week if you use 10 gallons. 140 gallons would save $25.20 at 18 cents. How many people use that much gas in one week? I don’t.

    What was I saying earlier?

  15. Fredex commented on May 1

    I’ll believe in CAFE standards when the limos our lawgivers use meet CAFE standards.

    I have owned two SUVs. I don’t want an SUV; I want a station wagon. CAFE standards screwed up station wagons. The work around was to put a station wagon body on a pickup truck chassis and call it an SUV.

    A new round of CAFE standards will screw up something else.

  16. cinefoz commented on May 1

    Steve in TN,

    I get something similar at this time … You are correct in saying this type of information is helpful. In fact, is an understatement.

    Although the one I get includes recommendations (and they are pretty good), I like have an independent judgment based on economics and psychology. Backward looking statistics are not indicative of future returns at times of transition. This is a time of transition and I am having trouble reading it.

  17. Smashed Particle commented on May 1

    So isn’t the real question “why are there taxes on gasoline in the first place”?

    It’s so odd to listen to people talk about the negative effects of lowering taxes.

    You can boot all the people in govt positions that you want…it won’t make a difference. You can elect moral, upright citizens to take their place but the corruption and rot will roll right through them as well. It’s not the people….it’s the system. We have been seduced by a monetary regime. As long as this regime exists it will always favor the few at the top while the rest of us chase our tails, especially economists.

  18. Francois commented on May 1

    “It’s because they view high prices as a temporary situation. They fail, wittingly or unwittingly, to grasp peak oil.”

    Man! I don’t know about peak oil, but even without it, the situation is a perfect Charlie-Fox.

    1) The 8 biggest oil conglomerates in the world are go-vermin owned. Yup! Remember, for comparison purposes that Exxon is 20 times smaller than ARAMCO, the Saudi National Oil Co.

    2) From above, it is safe to assume that politics play a non-negligible role in hiring and deciding in these conglomerates. How many western-based producers have been pushed out of various fields these last 3-5 years? On the top of my head, I remember Mobil vs. Puto Chavez, BP or Exxon vs Comrade Vladimir in Russia. Speaking of Tovarich Putin, Russia has reported a drop in nat gas production for the first time in a long time if not for the first time ever.

    Another pernicious effect of this global nationalization is the loss of technical expertise sometimes caught in the “purges” decided by the political apparatchiks named by the “deciders”. Venezuela has a lot of good technicians that cannot work, since they’re on a black list of “potential enemies of the revolution”. We can laugh at Chavez, but this translates into a surefire way to decrease output and erratic maintenance.

    Since these entities are political in nature, where do you think the windfall in profits goes first? You got it! Social pork and expansion plans that makes great photo ops for the politicians, but minimal investment in the golden goose. Yet another factor that will lead to decreased production over the mid-long term.

    3) Domestically, there are a couple of things requiring answers.

    a)How is it that refiners operates at 80% of capacity when demand is so high? I’m sorry but I do not buy the “margins are so thin” story line? If demand is high, how come margins don’t improve? Give me a break; or at least a sensical explanation of why it is so.

    b) A Barry said above, we haven’t had an energy policy since Noah got off the Arch, and we are now paying the price. I have no hope whatsoever that we shall have one in the next decade, unless Washington is brought to the woodshed and beaten silly…several times. The bastards never learn until brutal expulsion is a clear and present danger. Too much money, too many special interests groups, and zero sense of the common good is what is going on in DC right now. They can’t even bring themselves to confront the agribusiness lobby in order to alleviate children’s hunger in their own country (Note to the clueless; there is hunger in the USA, and no, a 5-year-old child can’t get a job) so taking on the energy lobby…good luck with THAT. A temporary suspension of the gas tax is so much more appealing my dear, don’t you think? But of course my dear, you are so right? (excuse me while I reach the air baaaaaaaaaaaaaaaaaaaaaaaag)

    Bottom Line: We shall pay, and dearly for a long time to come, unless we all work form home, wear sweaters in winters, insulate our houses to the max and grow our own organic gardens.

    And these idiots wonder why the natives are getting restless?

  19. SPECTRE of Deflation commented on May 1

    And Obama doesn’t? LOL! You have to be frigging insane, but then again he didn’t know his pastor’s stance on anything for 20 years. He should do wonderful. SHEEPLE!!

  20. Mike commented on May 1

    Agreed, the idea seems like a poor solution. I’d be curious as to the short term demand elasticity for gasoline. I’ve seen a few studies suggesting that short term gas demand is relatively inelastic. And since the DOE claims the average American uses 500 gallons of gas per year, in a two car household that’s 1000 gallons. Over the course of a summer(333 gallons x $0.185), an average two-car family would only save about $46. Hardly a windfall…..

  21. Steve Medina commented on May 1

    I agree that removing the tax will have no immediate impact on the price, however it will make it more profitable to be in the oil business. Long term this resuls in more investment and increased supplies, all other things being equal, and would result in lower prices long term. (Of course that’s only if you don’t impose a windfall profits tax or some other type of measure that would only have the impact of driving investors away from this sector.)

    Gas is a great example of an elastic price supplie/demand commodity. Everyday millions of people feel they have no choice but to pay whatever gas costs, but millions of others are out there making choices. People are choosing to vacation with the family car instead of the motor home, or go someplace closer to home. Some people are riding bikes to work, while others are going to buy the hybrid instead of the SUV.

    The gas price is set to sell all the gas. If you lower the price people will make other choices and you will run out of gas. It really is that simple.

  22. DB commented on May 1

    Barry,

    How can you say removing taxes is “artificially” lowering the price?

    The taxes themselves artificially raise the price of gasoline. Also, consider that the 18.4 center per gallon is the Federal tax -there is also state and local taxes in a lot of areas.

    Additionally, according to the head of US DOT, only 60% of the Federal gas tax actually goes to highway and bridge construction, the other 40% is for other, unrelated issues. (source: http://en.wikipedia.org/wiki/Fuel_tax)

    We should lower the Federal Gas Tax permanently, not advocate a raise or the status quo.

  23. Douglas Watts commented on May 1

    It is well known that when Ronald Reagan became president his administration dismantled and philosophically repudiated the only energy conservation policy the U.S. has had since rationing during WW II — that initiated under Jimmy Carter. The idea of saving energy (or even not wasting it needlessly) was derided by the Right as effete, euro-hippy, surrender monkey unAmericanism. Real Americans bought El Dorados that got 3 gallons to the mile and left all the lights burning all night. The real problem, the Reaganites intoned, was that treehugging bald eagle cuddling New York liberals were keeping us from drilling for oil in Yellowstone Park. As you can tell, none of the basic attitudes that ended our only post WW II energy conservation policy are still going strong today.

  24. dtt commented on May 1

    The reason refiners are running at 80% is because demand is off in the US. The crack spreads are getting tighter (difference between the price of gas and the cost of crude) because the price of gasoline has not kept pace with cost in crude. It is the inefficient producers that are shutting in production because they are losing money at these prices. High prices to not mean high profits for refiners. Even Exxnon this morning showed a $700M decline in refining profits for Q107. Valero, the largest US refiner, saw profits off 85% in Q1.

    YOu cannot confuse high prices with big profit. Profit drives production, not the price.

  25. Bob A commented on May 1

    Why would anyone who has oil want the price of oil to go down?

    Isn’t Job One for people who have oil to make sure oil revenues stay as high as possible?

    Whenever things don’t seem quite right, look to whoever is making the most money off the situation for clues to the reason why.

  26. John Galt commented on May 1

    But what if we eliminate the gas tax, tap the strategic reserve, and expropriate the profits from the oil companies?

  27. katelab commented on May 1

    What doe making political promises have to do with economics?

    We are subsidizing farmers to burn our food aren’t we?

  28. Steve Hargreaves commented on May 1

    U.S. gas: So cheap it hurts

    Relatively low taxes have kept pump prices far below most other developed nations, which some say is precisely why the current runup is so painful.

    Despite daily headlines bemoaning record gas prices, the U.S. is actually one of the cheaper places to fill up in the world.

    Out of 155 countries surveyed, U.S. gas prices were the 45th cheapest, according to a recent study from AIRINC, a research firm that tracks cost of living data.

    The difference is staggering. As of late March, U.S. gas prices averaged $3.45 a gallon. That compares to over $8 a gallon across much of Europe, $12.03 in Aruba and $18.42 in Sierra Leone.

    The U.S. has always fought to keep gas prices low, and the current debate among presidential candidates on how to keep them that way has been fierce.

    But those cheap gas prices – which Americans have gotten used to – mean they feel price spikes like the ones we’re experiencing now more acutely than citizens from other nations which have had historically more expensive fuel.

    Cheap gas prices have also lulled Americans into a cycle of buying bigger cars and bigger houses further away from their work – leaving them more exposed to rising prices, some experts say.

    snip

    http://money.cnn.com/2008/05/01/news/international/usgas_price/index.htm

  29. Mr. Flibble commented on May 1

    Isn’t it nice that people like us can consider 20 or 25 bucks a week ‘chump change’?

    Cinefoz got to this one first, but he’s presenting the “best-case” scenario, which is that savings for the average family is going to be pretty paltry.

    But your response is informative because it shows that we’re being led to believe that we’re going to be getting a lot for nothing. But when you do the math you realize that your savings will get you less than a burrito at Taco Bell. If McSame and Hillary think this will help it just shows they are a pair of howler monkeys with no clue.

    I’d only add that you’re also assuming that increases in demand wouldn’t substantially offset the alleged savings.

  30. Francois commented on May 1

    dtt,

    Thank you for the explanation. Much appreciated.

    This, however, raises a question: Why can’t refiners sell their product elsewhere, in areas of high demand? If it is down in the US, it is most certainly not the case in other parts of the world.

    Plus, producing oil is one thing, but it MUST be refined to be usable, correct? Hence, refiners should be a crucial link in the oil food chain.

    Or am I (yet again) missing something? ;-)

    Thank you

  31. VJ commented on May 1

    A quick lesson in Supply & Demand 101 for the Maverick McSame and Yoko: Strong demand and limited supply of a product lead to price increases.

    Actually, shutting down and eliminating hundreds of gasoline refineries leads to price increases.

    In 2000, there were 350 gasoline refineries in this country, and by 2003, there were only 140 gasoline refineries in this country, a 60% reduction in refining capacity.

    The fact that there have been no new gasoline refineries built is because the oil companies DO NOT WANT THEM BUILT. They WANT a restricted supply of gasoline because it drives the price up.

    ABC News Business Correspondent Betsy Stark on the April 29th, 2008 ABC World News:

    experts say it’s the big oil companies that are reluctant to build any new refineries

    If you artificially lower the price of something…

    Or artificially raise the price of something.
    .

  32. VJ commented on May 1

    Steve,

    They implemented MPG standards for cars that would rise through the years. It actually worked well for awhile. Then some politician (correct me if I wrong, but I think this was all under Clinton) decided an SUV was not a car, but a truck and was thus exempt.

    Consider yourself corrected. SUVs were classified as trucks for CAFE standards purposes before Clinton took office. The Clinton administration tried to have them reclassified as cars, as well as raise the CAFE standards across the board, and Holy Hell rained down on them.
    .

  33. Barley commented on May 1

    Point is that American lifestyles and urban design initiatives are predicated on cheap juice to move people from points A to B.

    The current challenge is that the financial prospects for the citizens of most G8 nations have not improved over the last 10 years. Real wages for the majority of folks have not moved up and any wealth has been created by simple property. Now that this wealth is circling the drain so will the financial prospects. People will feel poorer.

    I would add that there is now a huge unimaginable chasm between the haves and have nots. The wage differential between the person who manages reception and the person who sits in the corner office is staggering. And in this economy with food and gasoline prices soaring, it is the have nots who will feel the pain. I suspect this pain will become worse and folks will begin to ask for change. The tipping point will be when people are starving and not driving.

  34. VJ commented on May 1

    Yesterday, Obama claimed the federal gas tax holiday would only save the typical American 30 cents a day or $28 for the entire Summer. The federal gas tax is 18.4 cents per gallon.

    Who uses less than two gallons of gas a day ? A lot of people could use that just going back and forth to the gas station to buy gas. There are lots of truckers who fill up their 300 gallon tanks several times a week, and they are attaching fuel surcharge bills for everything they haul, which is about everything we buy.

    The idea that this would not save people money is ridiculous. As to the long term economics, it’s a TEMPORARY proposal folks. As long as the $11 billion going to the Transportation Trust Fund is replaced, which McCain does not do, I don’t see the problem.
    .

  35. DJ commented on May 1

    Who uses less than two gallons of gas a day?

    Who drives less than 40 miles of driving a day? A lot.

  36. F commented on May 1

    VJ,

    The average American drives 12000 miles per year. For an average fuel economy (20 mpg), this is 600 gallons/ year. At 18.4 cents/ gallon, this is $120/year. With 365 days in a year, that’s $0.30/day. Math is fun.

    I say $2 gas tax, with the proceeds going to way overdue infrastructure improvements and a Manhattan project for energy. We used to dream big in this country….

  37. DK commented on May 1

    According to AAA, the average American drives 29 miles a day (higher for men vs women). If you drive a car or even an SUV that gets 15 mpg or more, that’s 2 gallons a day tops. I agree with Barry, this gas tax doesn’t do much, economically or politically. Proposing a real long term energy policy and executing the hell out of it is what the boys and girls in DC need to do, and less politicking.

  38. dark1p commented on May 1

    Cinefoz–hmmm, good point. Don’t know what I was thinking.

    However, to F and others, I’d really stay away from ‘average’ miles driven. Nobody is average, as the saying goes. Gas isn’t an issue at all for people like me, who live in a big city and walk or use public transportation for everything. I think I spend about $500 a year on gas for rental cars, tops. Take all the people like me out of the equation, and the average goes up. Don’t know where we could find figures like that, though.

  39. F commented on May 1

    Average is the best measure we have.

    But for another way of looking at it: 18 cents is about 5% of current gas costs. A 5% discount just isn’t going to have a meaningful effect.

  40. F commented on May 1

    Also, we could approximate. Even if exactly half of all Americans did not drive at all (which is a pretty ambitious assumption), this would only double the average for everyone else. $0.60/day.

  41. Moses commented on May 1

    How abt eliminating those make work toll takers?

    Think that is abt 100yrs past due?

    FOrget abt temporarily doing away with the direct excise taxes,

    how about doing away with them completely?

    Isn’t it enough to take in almost 50% of billions in direct income taxes?

    The gov’t is the single largest profiteer in the equation-just the idea that people believe the 18cents is even a teeny iota of what they take in fr the fuel and gas industry is hysterical.

  42. Moses commented on May 1

    The other hysterical thing are the Barry Ritholtz’ of the world crying for more federal intervention via comprehensive energy plans.

    Sure Barry the solution is to look to the Dept of Energy [BR: Who said anything about the energy dept?].

    I had a hard time even typing that out without wiping the snot off the keyboard fr laughing like a hyena. i honestly dont care how its done, i want cheaper forms of enegy -said avg sheep.

    Will come from:

    US Capitalists -400
    Foreign Capitalists even
    US FED +20000
    Euro Social Fed +250000
    Arabs-infinite-1
    Communists -infinite-1

    *others available upon request

    ~~~

    BR: Unlike the ideologues that contributed to this mess, I believe in democracy — and that means using the power of a democratically elected government to direct research, tax credits and regulatory authority towards a specific goal.

    There are certain things the free market does not excel at — and this is one of them.

  43. donna commented on May 1

    Actually, that burrito at Taco Bell might get you some gas – they’re giving away free fuel (cash to fill up your car). Interesting promotion.

  44. engineer al commented on May 1

    “The idea that this [fuel tax holiday] would not save people money is ridiculous.”

    Actually, the idea that this would save us any money is completely absurd. It makes about as much sense as taking a holiday from oil changes to save yourself a couple of dollars at the QuickieLube.

    I don’t understand how some of us are trying to get away with claiming a fuel tax holiday (or doing away with it completely) is a good idea. De-funding needed road work is a better value? Stopping every few miles instead to pay a toll is a good idea?

    One of the things John Kerry got burned for in 2004 was when a 20-30 year old clip surfaced where he suggested an added 50 cent fuel tax might be a good idea. A good idea to reduce demand and fund alternative fuel research. Gasoline was less than $2/gal in 2004, about half the current price.

    Increasing CAFE standards is a good place to start but the results will be years away. Fiddling with speed limits could yield an overnight result (slowing from 75mph to 55 boosts fuel economy by 20%) but I doubt most of us would stomach the “sacrifice”.

    This whole “fuel tax holiday” argument is a good example of what’s wrong with the current political scene. Faith based vs. reality. It’ll be interesting to see who comes out the “winner”.

  45. Nathan commented on May 1

    We can quibble over whether savings of 18 cents a gallon would equal $25 or $40 for the average American over the course of a summer, but that’s assuming that gas prices would actually go down 18 cents. I think the more important point here is that reducing the surcharge by 18 cents does not mean that the final price to consumers will go down 18 cents. In fact, there are sound economic reasons to think that it won’t. Re-read Barry’s post (or Krugman’s post today on the same topic).

  46. Empire commented on May 1

    So your proposal for the long-term prospects of this country is to wipe out the coastal ecosystem and generate as much toxic radioactive material as possible? Because, after all, that’s our grandkids’ problem, and who cares about them, right?

    ~~~

    BR: My proposal is nothing is off the table.

    What is your alternative — shipping money to the middle east and burning fossil fuels for the next 100 years?

  47. Brian in Seattle commented on May 1

    Where’s the politician that will state that we need to build rapid mass transit in every city of greater than x amount of population and build high speed electrified rail to connect all of those cities? This project needs to be on the scale of the interstate highway system.

    That’s what I want someone to actually say and start the building process instead of pandering. If someone actually wants to cut down on per capita gas consumption in the long term, that would be the way to do it.

  48. DMR commented on May 1

    VJ,

    What you are really telling us is that the government needs to bail you out for making the decision to drive your truck to your McMansion that is 40 miles from your workplace.

    What’s that whisperig?

  49. Paul in NYC commented on May 1

    When SUV’s were classified as “light trucks” and so did not have to have the MPG efficiency of “cars”, they were really still another type of car. Suburbanites (most anyway) would never say they drive a “truck”, when, for all intents they do. What amazes me is that the next most popular suburban model- minivans- also get crummy MPG. Americans were dumb enough to ignore fuel efficiency.

    What aggravates me is that Toyota stopped making wagons entirely in 1996- the last model year for both the Camry and Corolla. My wife and I bought a ’95 Camry wagon used in 1998, and the damned thing STILL gets 27 MPG. The only thing even close to this is their Sierra minivans, but their MPG is a piddling 23. I asked myself why they stopped making wagons, and it is clear they were not just reacting to the market but shaping it- offering all manner of vans and SUV’s, from the Highlander (24MPG) and culminating in the Sequoia (19MPG), but ignoring wagons. Sometime ago Toyota decided fuel efficiency was not a factor in sales. Now, ironically they are dominating the hybrid market with the Prius.

  50. John Wellman commented on May 1

    Real Estate will keep the demand for fuel inelastic. Regardless of type of vehicle driven, commute mileage has risen due to people chasing cheaper sprawl driven homes. Until there is a development solution that allows the average person to live drastically closer to work, people will still sprawl, to pay a smaller mortgage, etc. And we thought variable/unconventional loans were bad! This structural problem is far harder to fix than waiting out some bad RE market times.

  51. seamus commented on May 1

    >Americans were dumb enough to ignore fuel efficiency.

    This blew my mind in the mid-’90s when suddenly everyone was trading in their Tauruses and Golfs for Explorers and Grand Cherokees. Gas was $1.30/gallon (and people were complaining about that!), but people never gave full efficiency a thought. I mean, nobody was talking about it at all.

    I have to admit a certain level of Schaudenfreude when local TV stations interview SUV or minivan drivers at gas stations, and they express regret for their purchases, many of which were completed already in the era of $2.50-$3 gas. What did you think was going to happen?

    >Real Estate will keep the demand for fuel inelastic.

    Yes and no. It will certainly depress the prices of exurban housing (which is already getting killed by the current housing bust), but I’ve seen more and more counties setting up long-range bus service from suburbs to downtown work areas, and even inter-suburban buses. Additionally, big employers themselves often provide their own shuttles as a worker benefit. Here in the Bay Area, 101 is loaded with shuttle buses running between points in SF and points in Silicon Valley.

    In this era, for an exurban community will require commute alternatives if it has any hope of drawing working families.

  52. John L commented on May 1

    Lots of good comments and questions above. I’ll attempt to answer a few questions from above (I used to work in the Oil Industry).

    Regarding the question as to why refineries only run at 80% of capacity, there are several reasons. First, refinery operating rates fall every winter and spring due to annual maintenance turnarounds required to keep the processing units running at maximum efficiency, in preparation for the summer driving season.

    Second, due to environmental regulations enacted over the past 15 years, the ability for refineries to make on-spec gasoline has become much more difficult. Today, maximum refinery utilization is only about 95% of crude oil capacity due operating constraints on gasoline processing units to meet spec. Off-spec gasoline blending stocks must also be re-refined, which reduces output. This is especially true for summer-grade gasolines which require a lower vapor pressure to limit evaporation.

    Third, refining ecomomics are defined by the crack spread, which is basically a gross margin metric for a refinery. Currently, the gasoline crack is small/negative due to the high cost of crudes (gasoline is more expensive than crude oil on a relative basis). At times, refiners will temporarily decrease runs when margins are negative at high cost refineries. Refiners really don’t like to do this, and will often wait to see if a competitor cuts runs first.

    As to the comment questioning why aren’t more refineries built, there is really only one reason: NIMBY. The last new refinery built in the US was in 1975. However, since refiners have completed the expenditures for the last round of desulfurization programs, there are finally some significant expansion projects underway around the country. Also, when refineries make their annual turnarounds, they typically de-bottleneck to the extent possible, which usually adds about 1% capacity, per annum.

  53. Simon commented on May 1

    trust the oil industry to have a term like “crack spread”….

  54. Matthew Lock commented on May 1

    I think the author is dead wrong about the effects of removing the tax.

    Let’s say that the 18c tax is removed, and the higher demand does cause the gas to rise by 18c (which has the effect of making oil companies more profitable which they can use to invest in more exploration new tech etc – not a bad thing), wouldn’t competition between oil companies mean that the company that doesn’t increase the gas price by the whole 18c get all the customers? Once an oil company is selling gas say 10c cheaper than everyone else all the other companies will have to match that price, or else lose out to the cheaper company.

  55. VJ commented on May 2

    F,

    The average American drives 12000 miles per year. For an average fuel economy (20 mpg), this is 600 gallons/ year. At 18.4 cents/ gallon, this is $120/year. With 365 days in a year, that’s $0.30/day.

    And if you and Buffett are in the same room, the average net worth of each person in the room is $31 billion.

    ~~~

    al,

    Actually, the idea that this would save us any money is completely absurd.

    Reread the part of my post in regards to truckers adding fuel surcharges to every load they haul, which consists of just about everything we purchase. The federal tax holiday would apply to diesel as well.

    I don’t understand how some of us are trying to get away with claiming a fuel tax holiday (or doing away with it completely) is a good idea. De-funding needed road work is a better value?

    McCain is the only one who irresponsibly wants to suspend the federal fuel tax without replacing the loss of $11 billion to the Transportation Trust Fund.

    This whole “fuel tax holiday” argument is a good example of what’s wrong with the current political scene.

    Nobody but McCain is offering it as the ONLY response.

    ~~~

    DMR,

    What you are really telling us is that the government needs to bail you out for making the decision to drive your truck to your McMansion that is 40 miles from your workplace.

    No, I wasn’t referencing myself, but there are plenty of farmers, ranchers, and business people who have to drive over distances with full-size trucks, a lot of them 4WD, which do not get more than 20 MPG.

    ~~~

    John,

    As to the comment questioning why aren’t more refineries built, there is really only one reason: NIMBY.

    Wrong.

    The oil companies were offered abandoned military installations which would not have suffered from any NIMBY objections.

    The last new refinery built in the US was in 1975.

    Because the oil companies do not want new refineries built. See my previous post upthread.
    .

  56. uuu commented on May 2

    “We have no energy policy, and none on the horizon.”
    Huh?!?! Oh yes we do. Spend half a trillion annually on the military and then venture forth and steal all the oil we can get away with!

  57. Nick commented on May 2

    Many are those who look at economic metrics — which are abstractions — and fear the coming disaster. And this is a correct observation. But it’s like looking at a train bearing down on you and spending all your time sitting there, tracking the movement of the approaching train.

    The disaster is, in fact, not one of economic metrics. It is purely an issue of value production, or the lack thereof. Tons of _real resources_ have been spent on projects that have zero, or negative, value creation. War, for example — a fantastic example of the spending of real resrouces, with the goal of actually destroying value. Another is the spending of real resources to facilitate unneeded real estate transactions. Real resources: like employing 2 million extra people in the real estate “industry”. People who consume real food, energy, and other resources whilst producing zero real value.

    The solution to this disaster is not manipulation of abstracts. The only possible solution is real production, innovation, efficiencies, and value creation. I can think of no other area that is screaming for value creation than energy infrastructure. Whether the investment comes from the private or public sector, matters little at this point. Either way, the needed value would be created.

    Talk about an elegant path to take through the woods — damn, its just perfect.

    Barry is right on point.

  58. Moses commented on May 2

    Unlike the ideologues that contributed to this mess, I believe in democracy — and that means using the power of a democratically elected government to direct research, tax credits and regulatory authority towards a specific goal.

    Despite the fact that the last time this plan succeeded was getting to the mooon, if you can call NASA some kind of success,

    before that the ABOMB=

    yea Barry, keep thinking those without a financial stake will bail you out.

    The free market has not failed here either.
    It is hardly a free market when the supply is given forth by cartel.

    The FED, the States cannot dole out anything properly or efficiently and yet people want more gov’t intervention.

    Will you ever learn? This problem is almost 100% borne of your gov’t beauorocrats overreaching their mandates.

Read this next.

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