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March 26, 2012

"Politicians and The Price of Gasoline"

Last weekend I was honored to be a judge at the National History Day competition.  Why is it that Middle School kids understand what adults don’t:  that you can learn from history and, hopefully, not repeat the same mistakes?  Case in point, the tax on gasoline.

As gas prices push toward the $5 per gallon mark, politicians are trying to give the impression of doing something they cannot do:  get prices back down.  Politicians don’t set gas prices, the free market does.  But sometimes, in their haste to appear engaged, the pols do more harm than good.

Obama speaks in Oklahoma, saying he’ll fast-track the southern portion of the Keystone pipeline, even though the White House has no say on the already approved project. It’s political grandstanding, but harmless enough.

But in Hartford when the D’s and R’s get together and agree to mess with gas taxes, watch out.  This is no more than bipartisan pandering to motorists, which will end up hurting both drivers and the users of mass transit.   Here’s the story.

In Connecticut we pay about 49 cents a gallon in taxes… 25 cents in regular taxes and the balance in the Gross Receipts Tax paid by wholesalers and passed along to us at the pump.
The lawmakers want to put a cap on the Gross Receipts Tax for about a year, savings us about 1.7 cents a gallon.  That’s right… less than two cents.  

Pennies in savings, but at what cost?  Do lawmakers forget where the gas taxes go… and what happened the last time they cut gas taxes when Rowland was in office?

Here’s the math:  for every penny a gallon collected in gas taxes, $15 million goes into the Special Transportation Fund to pay for highway and bridge repairs, salt for winter roads and subsidies for mass transit, taking cars off the road.

That fund is already in trouble and could run out of money in two years, leading to talk about finding new sources of revenue… like tolls.  A political stunt like this gas-tax cap will save the average motorist pennies, but leave our highways in disrepair and push bus and train fares ever higher.

Even at $5 a gallon, gas in the US is cheap compared to the rest of the world.  Yet, we drive the biggest and least fuel efficient cars and moan at the cost.  Why do Americans think they have a God-given right to cheap gas?

Sure, gas in New Jersey is cheaper.  But they have tolls on their roads.  Pick your poison… taxes or tolls… because there is no free ride.

What’s driving gas prices higher is not state taxes but Wall Street speculation and geopolitics.  Why not do something to regulate investors betting gas prices will go higher and, in effect, making them do just that?

And when (not if) Israel attacks Iran and the Straits of Hormuz are closed, choking oil deliveries and sending gas to $8 to $10 a gallon, do lawmakers really think that a two cents a gallon saving in state gas taxes will mean anything except for less spending on our roads and rails?
Next time you’re driving on I-95 and wonder why the potholes aren’t filled or worry if the bridge you’re on might collapse, thank your elected officials in Hartford for their short-sighted penny pinching.



The New York Times put this issue to rest with an excellent story:



I enjoyed your editorial “Politicians and the price of gas”.

I absolutely agree that tinkering with the gas tax is political theater and that lowering it, even temporarily, is a bad idea. Such “use taxes” are reasonable and appropriate and we all benefit from them.

However, you contradict yourself when discussing the reason for high gas prices. In the 3rd paragraph you state that “Politicians don’t set gas prices, the free market does”, but in the 3rd from last you state that “What’s driving gas prices higher is not state taxes but Wall Street speculation and geopolitics”. Which is it?

Geopolitics (and just plain old politics!) certainly plays a role in the market as both producers and consumers have to guess about a lot of things (which is true in any market) such as future demand (Is growth in China going to accelerate or slow down?), potential supply disruptions in the Middle East, new finds, pipeline construction, etc., etc.

What’s not true is that the high prices are due to Wall Street speculation. This canard gets repeated over and over, from both sides of the political aisle. It’s politically convenient but isn’t true. As I like to ask people who say this, “Show me the trade”. Exactly what can someone speculatively buy and or sell that can artificially (and persistently) raise the price of oil (or any commodity) above the “natural” market price, and more importantly, how can you profit from this trade?

In the oil futures market (where the price of oil is set), as in any market, there is a seller for every buyer. In every one of the myriad trades that occur every day, one side will profit if prices rise and the other if prices fall. Hedgers (companies, like airlines, that use futures to lock-in costs) are generally buyers, so speculators, in providing them liquidity, are generally more likely to be “short”.

This same “Wall Street speculation” argument was trotted out repeatedly in the summer of 2008 when gas prices last “spiked”, with oil hitting $145/bbl that July. It’s amazing how it evaporated as prices then declined to under $34/bbl by December of that year (chart attached). And now, with all the carping about oil prices, we don’t hear anything about “speculation” in the natural gas market where prices are near all-time lows (chart attached).

New supply (and slack demand this winter) has glutted the market so much that a Wall Street Journal article today (3/29/12, p. C1) suggests that prices of natural gas could become zero or negative – producers will literally have to discard it or give it away.
Ronald Reagan said, “the nine most terrifying words in the English language are “I’m from the government and I’m here to help”.

I cringe every time I hear politicians, or others, talk about “comprehensive energy policy”. We don’t need energy policy any more than we need food policy, cell phone policy, or shoes policy! Such “policy” is really market intervention that distorts prices, limits choices, and inhibits innovation.

Just think of the product availability, innovations, and price reductions in cell phones and tablet computers – without any government “help”.
Appreciate your thoughts and would love to see someone in the press examine Wall Street speculation in more detail.

Paul G. Staneski, Ph.D.
Managing Director
Head of Derivatives Solutions & Training
Credit Suisse Securities (USA) LLC

Pearson said...

I think, the politicians never wanted to reduce the
oil prices or make some mechanism for this process as the oil companies are always there sponsors in election.

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