{"id":14473,"date":"2015-05-28T20:51:53","date_gmt":"2015-05-29T03:51:53","guid":{"rendered":"http:\/\/lifeboat.com\/blog\/?p=14473"},"modified":"2017-04-29T15:45:36","modified_gmt":"2017-04-29T22:45:36","slug":"increase-gas-tax-as-cartel-price-rises","status":"publish","type":"post","link":"https:\/\/lifeboat.com\/blog\/2015\/05\/increase-gas-tax-as-cartel-price-rises","title":{"rendered":"Increase Gas Tax as Cartel Price Rises"},"content":{"rendered":"

It\u2019s been awhile since the cost of gasoline topped $4 in the U.S. The national average hit $4.11 on July 11, 2008 and came close in May 2011 at $3.96. On New Years Day 2015, I drove through the night from Chicago to Boston. Despite the cold weather, the economics of fuel made it the best day for a road trip in years. I bought gas at a Pilot service station just off the Ohio Turnpike at $1.92\/gallon. For me, it seemed like a bargain. Yet, 23 states charge less for gasoline<\/a> than Ohio.<\/p>\n

<\/a>Now, at the end of May 2015, gas is rebounding from that low. Drivers on Memorial Day weekend faced the highest cost for gasoline of the year so far.<\/p>\n

It\u2019s tempting for politicians to advocate using tax breaks to smooth price spikes. With energy often surpassing the expense of food and rent and with so many individuals using fuel to make a living, reducing user fees or taxes during periods of very high fuel cost seems like the humane thing to do.<\/p>\n

It seems humane, but it has the opposite effect. In fact, it is deeply punitive! That\u2019s because the cost of gas is not an act of nature, nor even of free market economics. It is a product of cartels, special interests, conflict and FUD (fear, uncertainty and doubt). Offering relief during price spikes sustains demand while doing absolutely nothing to increase supply. This, in turn, exacerbates the spike, creates shortages for critical services and transfers enormous sums of money from consumers to producers. In effect, it is a free gift for producer nations.<\/p>\n

In fact, consumers and consuming nations are best served by a raising<\/em><\/span> taxes in lockstep with fuel price increases.<\/p>\n

In May 2011, as gas prices were spiking to an all time high, a group calling itself National Taxpayers Union<\/strong> or NTU launched a $1.25 million campaign<\/a> to fight energy taxes, like the fuel tax added to the cost of gasoline at the pump in most countries.* One of the group\u2019s less controversial public service announcements (or more accurately, a lobbying effort) consist of magazine ads and videos<\/a> that encourage Americans to write their legislators and demand a roll back of gas taxes whenever market prices spike.<\/p>\n

\"In\u00a0supplier
In supplier controlled markets, consumers can contain costs by magnifying<\/span><\/em> spikes.<\/figcaption><\/figure>\n

I hate consumption taxes, especially the ones that target individual commodities or categories, such as alcohol, cigarettes, luxury purchases, or any system of import tariffs. They are a form of social engineering and they bastardize free markets. But when an energy consumer nation gives consumers breaks during periods of price spikes, the result counters the social intent. In fact, each time that oil prices rise, the best thing our government can do is to force them higher still! This may sound crazy, but when the supply of a commodity is controlled a few foreign cartels, it is no longer a commodity. Artificially lowering the consumer price by subsidizing the price simply stimulates consumption. It does not expand supply, and so the subsidy goes directly into suppliers\u2019 pockets.<\/p>\n

Apparently, I am not the only one who thinks that lower gas prices is a bad idea. Folling the 2011 gas spike (the highest cost gas spike in U.S. history), Motley Fool columnist, Travis Hoium filed an Op-Ed entitled, 3 Reasons the US Should Want Higher Oil Prices<\/a>. (At the same time, I cautioned against tax relief tied to gasoline price hikes<\/a>). His analysis and opinion is articulate and adequately supported, but none of his reasons point to the fundamental economic reason that for a country that aspires to energy independence, oil should be taxed higher whenever the market cost of externally sourced oil rises. Let me spell it out\u2026<\/p>\n

What happens if we lower<\/em> the cost of a commodity to consumers in an effort to counteract a higher supply price? It doesn\u2019t take an Economist to analyze. Since the supply is not increased, throwing a subsidy to the buyers \u201cfuels\u201d an even faster rise in prices and hands all that money to the supplier.<\/p>\n

Let\u2019s say that C = Amount of fuel needed for critical purposes
\u2026getting to work, heating our home, manufacturing
Let\u2019s say that D = Amount of fuel needed for discretionary purposes
\u2026vacation travel, backyard BBQ, mowing the lawn, etc<\/p>\n

Of course, with a limited personal budget, high fuel prices influence a consumer\u2019s decision to classify an activity as \u2018critical\u2019 or \u2018discretionary\u2019. Additionally, the use of fuel is greatly affected by how efficiently you perform a task (taking a train to work instead of driving, vacationing nearby instead of far away, etc).<\/p>\n

Foreign cartels wish to maintain high prices and high revenue, so they limit the foreign supply of oil. For them, it makes more sense to charge a lot of money for less product than to charge less money for a lot of product. If we consider again our classification of consumption into two categories, Critical and Discretionary, the supplier limits leave us with only enough fuel to support this much activity:<\/p>\n

100%C + 80%(D)<\/p>\n

Now if we counteract their production limits and insulate consumers from the higher cost, the formula doesn\u2019t change. We continue to use just as much fuel.<\/p>\n

In a free market, limited supply causes prices to rise and this forces consumers to cut back on discretionary use. Some consumers with less money must cut back on critical needs. That\u2019s because some people can afford the keep buying and of course the cost of fuel rises.<\/p>\n

In a free market \u2014 at least on our side of the ocean, this normally leads to several things \u2014 all of them very good:<\/p>\n

\u2022 Increase exploration and domestic production (Motley Fool covers this one<\/a>)
\u2022 Develop alternative fuels, especially domestic and environmentally friendly
\u2022 Increase conservation:<\/p>\n