Thursday, May 17, 2007

Higher Taxes = Higher Prices

"Of course, it’s frustrating to pay more at the pump, but oil profits aren’t the culprit, nor would punishment of the energy companies help to bring down the cost of fuel. When businesses pay a heavier burden in taxes, it doesn’t make prices go down; it generally forces prices to go up, whenever companies can pass on the cost to the consumer (see chart above).

The idea that “windfall profit taxes” would cause oil companies to charge less flies against every rule of economic reality. If you add to the cost of production with new levels of governmental taxation or regulation it means that either prices go up or else profits go down – meaning less incentive for production, less production and, inevitably, higher prices (see chart above)."

From Michael Medved's column today
on "obscene profits."


At 5/17/2007 2:31 PM, Anonymous Anonymous said...

I noticed many of your blogs relate to oil companies not controlling the price of gas because it is set from the "open market". Also, this article that opposes "windfall profit taxes". If you are on the side of both of these two points of view, how do you explain we are being charged record gas prices and these oil/gas companies are generating record profits every quarter/year? Wouldnt they be able to charge less and still make a profit? Also, our economy is based on the use of gasoline, so the typical economic supply/demand argument does not work. These are monopolistic/price gouging patterns. Finally, one of the reasons for high gas prices are because the current refineries are running near capacity and have a significant age to them but because there is no incentive for them to upgrade them or build new ones (because of the entry cost barriers) they just charge more and do not incur any penalty. As an economist, the price of gas/oil causes inflation, and has a spiraling effect on the economy. Besides do nothing and watching these oil companies get richer and richer (and they cannot be running that efficient - hard to believe that only the oil companies have the gold formula to be the most successful in the US), what do you suggest?

At 5/17/2007 2:57 PM, Blogger Mark J. Perry said...

The price of oil and gas don't cause inflation, just like falling computer prices don't cause deflation. Only excessive money creation causes inflation.

At 5/17/2007 3:00 PM, Anonymous Anonymous said...

[i]Wouldnt they be able to charge less and still make a profit?[/i]
Absolutely, but it does not follow that the oil companies are setting prices. At the current market price every gallon produced is sold; there is no gasoline pilling up in warehouses. If Exxon arbitrarily cut its prices by 13 cents (eliminating their profit), then all the other oil companies would STILL sell every gallon they produced. Everything produced was sold at $3.13 a gallon; cutting the price to $3.00 a gallon would produce a gasoline shortage as consumers consumed more and marginal producers produced less.

So, yes the oil companies could cut their prices and still turn a profit. But if they cut their prices then everything would go haywire, as regional gas shortages emerged and gas lines returned.

As for incentives to upgrade their refineries; they could not have any more incentive. Every dollar saved by making their refinery more efficient is pocketted as profits.

At 5/17/2007 6:41 PM, Anonymous Anonymous said...

One question...Why have they not built a refinery in the last 20 years and have none in the works? Or maybe abetter question should be why should they?

At 5/17/2007 10:59 PM, Blogger Gregory said...

Easy, owning a refinery is rediculously profitable. It costs a billion dollars to build and will pay for itself in two years at current prices, everything after that is pure profit.

This holds for anyone with a billion dollars to spend: Exxon, PDVSA, BP, Shell, Citigroup, Bank of America, etc. etc. That's right: an oil refinery can be built by anyone willing to spend the money. I'm sure a hedge fund or two would be willing to front you the money.

That said, there are numerous refineries in the works. Saudi Arabia is building a brand new refinery in Texas. Exxon is building one in Mississippi, I believe. Regretfully, both are unable to get permits to begin construction due to local opposition.

As such, the only refineries coming on-line soon enough to help are being built in Mexico and Canada, where the laws are being written by organizations other than greenpeace [sic].


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