Friday, April 28, 2006

Aren't you sick of me talking about gas? 

Probably. And you might be sick of me tomorrow too, when we get to host James Hamilton of EconBrowser at 2pm CT on the Northern Alliance Radio Network. I'm still working on getting one of the folks at the group petro-blog The Oil Drum to join us, though it appears Prof. Goose is busy tomorrow.

UPDATE (11pm): Heading Out from The Oil Drum has indicated s/he will be available as well, so the discussion should be lively! Do tune in or listen to the stream.

Craig Westover tries his hand at a little economic analysis of Minnesota senatorial gas plans. Both DFLer Klobuchar and GOPer Kennedy, he finds, have some flaws in their plans. Kennedy's plan to temporarily suspend the gas tax -- an idea that originates in fact from a Democratic senator in New Jersey -- and crowing about "provid[ing] the deciding vote last fall to ... make price gouging a federal offense" is little more than the very publicity stunts he decries in the next paragraph. The reaction to a temporary tax cut is to encourage more spending on gas now. If I can use the period to top up my First Fuel Banks card, I am on it! But if we all do it, what happens to gas supplies? Craig correctly points out (though I will need to have the demand-vs.-quantity-demanded talk with him):

Now lets look on the price and supply sides. The price of gas suddenly drops 18 cents a gallon. Demand goes up and, duh, so do prices. Perhaps not 18 cents a gallon, but they will rise. If they don�t, stations are going to start running out of gas because the supply pipeline is stocked for the higher price/lower demand level. It�s ironic that someone on the bandwagon of investigating oil company profits is making a proposal that will effectively increase oil company profits.

But won�t the oil companies increase supply to meet the new, higher demand? No, because the demand is temporary.

So you won't save the 18 cents. Since the tax burden is shared between buyer and seller, cutting the gas tax in fact increases profits for the oil industry. (Maybe we should pass it just to watch Chuck Schumer's head explode.)

As the Oil Drum writers point out, this only serves to "worsen our dependence on oil by disincentivizing the innovation of oil alternatives and oil conservation efforts." The Klobuchar proposal does far worse by increasing oil companies' cost of capital just at the time when we want them to invest more in exploration and refining. The only way someone invests is when they can be sure government will not rapaciously seize the return on that investment. Talking about "holding oil companies accountable" is little more than asking "where's my sugar, sugar?"

Tune in tomorrow to see if we can make some sense out of all the hot air. If you can't catch us on radio, streaming audio is here.