Interestingly, this post was ported over, but only a few selected replies. I noticed that my reply was not posted over, but several replies to my original reply were. I’m sure some readers are a little confused about some of these relies and are wondering what they are talking about. So I will try to put in the gist of my original reply here.
The price of gas is determined by supply and demand. It always has and always will. Adam Smith detailed this in his book “Wealth of Nations” over 200 years ago. He has never been proven wrong. When people accuse someone or a group of someone’s of manipulating or controlling prices, it is not the prices they control or manipulate, its either the supply or the demand, or both.
The oil companies have been able to partly control the supply because the government allow so many mergers in the 90’s. Both parties had a hand in this. After Katrina, the equations for supply changed dramatically. There were fewer refineries after. Before the hurricane, the cost of shutting down the excess (in the oil companies view) were higher than keeping them open, but after, there was no incentive to reopen all of them.
The oil companies do not directly control demand, we did that to ourselves. From the 70"s to 1996, the CAFE (corporate average fuel economy) dropped every year. The result was a steady decrease in the price of gas. Starting in 1997, the CAFE slowly started up and picked up speed after 2001. The price of gas started up after 1999. After Katrina, it really skyrocketed. The price of oil on the world market contributed to this as well. A small decrease in OPEC’s output did this.
Now to my point. Oil companies a raking in a windfall because their costs have not gone up as much as the market price of gas. Some of their costs for the higher price of oil is off set by efficiencies of production at fewer refineries. An increase in the gas tax at this time would not significantly change the cost at the pump. it would come at the expense of oil company profits.
Everyday, the oil companies calculate the cost of producing a gallon of gas for each production level. The things that go into this calculation include all the costs of operating the refineries, storing the product at various stages of production, salaries, transporting and handling, etc. If they produce less gas, it costs more per gallon.
They also estimate how much gas will be sold per day at each price point. The higher the price, the less gas they will sell. These two calculations are plotted on a graph and the difference between the cost and price is the profit or loss. Somewhere on the difference curve is the highest profit for the day., and that is where the production levels and price is set. Each oil company has to do this independently and hope their competition draws the same conclusions. And they usually do.
Adding more tax does effect the equation, but it is not a direct addition to the price. The price could stay the same, or go up by less that the tax, same as the tax or more than the tax. In times of high profit, it is most likely to not go up significantly. The highest profit price for that day usually will not move significantly, unless the tax increase really cuts into the profits to the point of almost wiping them out.
To pick an arbitrary tax increase could have negative effects on the economy, but if the government did the same thing the oil companies did, adding a curve for various tax rates, the government could maximize their tax revenues, without putting the oil companies out of business. The could also control the price at the pump somewhat and encourage people to move to more to more efficient vehicles without massive disruption of the economy. The excess revenues could go to improvements in the infrastructure so gas is not wasted in traffic jams.
To further encourage the move to more efficient vehicles, the states could start basing their annual registration fees on the fuel requirements of the vehicle instead of the residual value of the vehicle. Starting with new vehicles, the fee would be graduated with the most fuel efficient vehicles paying the smallest fee and the fee going up for the excess fuel it uses. This would be paid annually for a fixed number of years, then dropped to the minimum when the vehicle has little life left and is probably owned by a low income person of family.
BTW, contrary to popular belief, providing money to cover operating costs of the government is not the primary intent of most taxes, it is the secondary intent. The primary intent of taxes is to control peoples behaviors. Only the income tax is primarily for raising money for the government, and some of the exemptions allowed are for controlling behaviors, i.e. charity giving.