Why are gas prices high?

Why are gas prices high?

Once again, everyone’s talking about high gas prices and big oil company profits. Some Republicans are even talking about a windfall tax of Big Oil. I blogged on that bad idea last September after hurricanes Katrina and Rita and it’s still a bad idea.

If you want sill more proof that it’s a bad idea, check out Jason at Texas Rainmaker who shows that oil company profits are not as high as in some other sectors and a huge chunk of the cost of the gallon of gas is in taxes. So why don’t politicians take the step they have in their control by reducing those taxes? If not couldn’t we say that they’re just as greedy as these mythical Big Oil executives who are gouging consumers?

No, instead they play on the ignorance economics of the average consumer:

The Democrats threaten to take oil company profits and invest them into “rebates” for consumers to make the public think they’re playing Robin Hood – taking greedy profits from evil big oil and giving it to the poor, average American so they can afford gas – completely ignoring the fact that the “rebates” will be offset by the oil companies passing such cost along to those very consumers.

But let’s look at two things higher gas prices bring us:

1. Conservation – people generally don’t buy what they can’t afford
2. Incentive to oil companies to explore – higher gas prices encourage gas exploration into areas previously restricted by cost, or exploration into alternative fuel sources altogether

But if government is taking away the profits and giving them to consumers as “rebates” then consumers have no reason to conserve, and oil companies have no incentive to explore. How do I know this? Because that very scenario played out in the 1970s and early 1980s.

Meanwhile, there’s also evidence that part of this steep rise in the cost of gas comes from government mandates for ethanol, which the farm industry has been pushing for, but which it wasn’t ready to supply the raw goods for.

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Written by
Domenico Bettinelli

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