Wednesday, May 21, 2008

Gas taxes and inventories

Today oil is at $132/barrel. Strong demand for diesel in quake-devastated China is blamed, as well as a report of low gasoline inventories:

In its weekly inventory report Wednesday, the Energy Department's Energy Information Administration said crude oil inventories fell by more than 5 million barrels last week. Analysts had expected a modest increase. Gasoline inventories also fell and took the market by surprise, while inventories of distillates, which include heating oil and diesel fuel, rose less than analysts surveyed by energy research firm Platts had expected.

This was at the crux of the argument over the gas tax that both McCain and Hillary Clinton were pushing a little while back. The idea is that the refineries are already running full-tilt, the supply of gas is fixed over the short term (the summer months) and therefore the price of gas is rising due to factors other than hoarding and speculation, which seems to be confirmed by these reports of low inventories. Since the supply of gas is relatively fixed, any artificial decrease in price (like suspending the tax) is just going to be cancelled out by the price rising until the demand for gas once again equals the available supply. Using a simple supply and demand graph, all you're doing is moving down a fixed supply curve. Since the quantity supplied neither increases nor decreases (for our purposes; minor changes might occur in real life), any movement along the demand curve is temporary as prices increase to get back into equilibrium.

Any beneficial effects of a gas tax holiday are contingent on the benevolence of the gasoline companies; keeping prices low and forsaking easy profits.

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