Gas Prices and Taxes

The price of a gallon of gas at the pump is determined by a complicated calculation. To maintain the same profit level the companies have to balance demand with price. At a certain price point people finally begin to buy less gas. So if the price at the pump goes a bit higher they actually make less profit because people buy less gas.
That is how the price of gas is set.
The important thing to realize is that it is the price at the pump that rules this profit/demand equation. This is set by the demand for gas, not the price of the oil. This means that the idea of a “gas tax holiday” reducing or eliminating the taxes can’t make a difference in the price of gas. If the equation shows the profit maximized at $4 per gallon, that is where the price at the pump will be. If they eliminate the tax the oil companies will say “thank you” and pocket the extra money. Because if the computers show the right amount of gas being sold at $4 at the pump, and people are buying a certain quantity of gas at $4 at the pump, then gas is going to be $4 at the pump whatever the taxes are.
In fact, it might enable to companies to raise the price at the pump, because without the tax their profit level is higher per gallon, so they can raise the price and sell fewer gallons to maintain that profit level.

1 thought on “Gas Prices and Taxes

  1. Er, you seem to have left out one little consideration. The oil industry can only charge a profit maximizing monopoly price if the competitors in the industry are acting in a collusive manner or if other factors make their commodity not subject to competitive market forces.
    Now if, say, a female senator from New York were to propose financing the Highway Trust Fund with a tax on oil company excess profits tax instead of a sales tax paid by consumers then the consumer would be no worse off even if the pump price stayed the same. Now where’s the gain? First, it would prevent enthusiasm for a “gas tax holiday” at the pump without any provision for an offsetting tax increase on oil companies leading to both oil industry profit windfalls and the loss of needed highway maintenance funding.
    Second, it would be a dramatic response to the excesses of supply-side economics. The financial power of oil companies have corrupted our military, environmental, and tax policies for over one hundred years. I don’t suppose in the near future we’ll be nationalizing our oil companies or even regulating them like public utilities – which is essentially what they are. So, in the short run, I’d say a modest proposal is long overdue to assign a baseline capitalization value on each oil company selling in the U.S. and, thereafter, taxing the excess profits they reap due to market failures.
    That’s what Sen. Clinton was proposing without any takers. This should make it clear that our politics is just about all out of lefties. Instead of taking any interim steps, we’ll just keep waiting for that comprehensive energy plan we’ve been waiting for since the 1973 Yom Kippur War.

Comments are closed.