Obama on gas prices: there is no such thing as supply and

Topics: Campaign2008
04 Aug 2008

From: Ervan Darnell

Obama is proposing a windfall profits tax on oil companies to pay for an
"energy rebate" [1]. There are lots of things wrong with this. First,
there is not actually any windfall to start with (Exxon made 10% versus
9% average for manufacturing) [2]. Second, oil companies have lots of
down years and are a high risk industry (a well might not work out,
Venezuela might seize your assets, or for that matter the U.S.
government in the form of ex post facto changing lease terms).

But the more serious error is the idea that taxing a product more will
not affect the price. That only works if you think corporations set
prices without regard to competition or consumer demand and that
investors don't care what profit they make. By that reasoning prices
would already be much higher than they are (why wouldn't Exxon take the
extra profit now?). This is the same liberal fallacy that says we need
minimum wage to keep wages up since employers can pay anything they want
(never mind that <2% of the work force makes minimum wage).

McCain on the other hand wants to cut the gas tax to lower prices. His
particular proposal is a gimmick for sure, but at least it would
temporarily lower prices. Obama claims that won't lower prices because
oil companies will just take it as profit. That's even sillier than his
first claim. McCain is talking about the federal tax on gasoline as
paid by consumers. Oil companies don't even see that money as revenue.
It's paid up front by the consumer, like sales tax. Obama's position is
in effect that if we get rid of the sales tax, prices will instantly
increase 8% (by California standards).

This is such a fundamental mistake, one has to wonder if he understands
anything about economics (or is catering to people who don't).

Oddly, Obama is in favor of tapping the strategic reserve to lower
prices. Why doesn't be believe oil companies would just raise prices in
that case too (when the price drops as it would with a tax cut)? It's
another case where he has it completely backward. McCain is in favor of
actually drilling more oil, which will lower prices. Obama says we
cannot "drill our way out"[3] of high prices[4], but he thinks we can do
some good by selling down the strategic reserve, which we have to
replenish eventually, thus not actually producing any oil, and
eventually raising prices as much as they are lowered temporarily by
selling it now. There are environmental negatives to drilling for sure,
but that's not the argument he's making in this case. Rather, he's
confused on a basic idea of supply and demand.

http://www.bloomberg.com/apps/news?pid 601103&sid=aNDP0C2N5fKc&refer=us
[4] I'm reminded too of Coulter's quip: "That's like saying we cannot
eat our way out of hunger."
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