What Biden’s Gas Tax Holiday Proposal Misses About the Real Cause of High Gas Prices

AMAC Exclusive – By Daniel Berman

The decision of the Biden administration to reject the advice of House Speaker Nancy Pelosi and embrace a “gas tax holiday” is a concession to political rather than economic reality. The administration has conceded the need to do something about the shock millions of Americans feel every time they go to the pump to fill their vehicles, but their actions are more an effort to simply look like they are responding to demands to do something rather than to actually do it.

For one thing, critics of a gas tax holiday are correct that the concept will do little in the long run to solve high energy prices. Those prices are, after all, a consequence of shrinking supply amidst constant or even increasing demand. Waiving the gas tax will not increase supply, and may even increase demand, further driving inflationary pressure. But, as John Maynard Keynes said in one of his few accurate remarks, “in the long run everyone is dead.” American families who are unable to afford gas right now are unable to get to work, worsening the labor shortage, and exerting inflationary pressure in other segments of the economy. Those who are faced with the choice between liquidating their savings and affording to fill their tank are helping to drive down both crypto and stock markets. In this case, a gas tax holiday, while no long-term solution, is the correct move to stem short-term bleeding.

Nevertheless, those long-term harms will accrue if nothing is done to address the real cause of high prices: a lack of supply. Conservatives are quick to blame a lack of investment, driven in part by the reluctance to invest in fossil-fuel projects (largely thanks to the rise of ESG investing), while Joe Biden has tried repeatedly to pin the blame for higher prices on Vladimir Putin’s invasion of Ukraine. The truth is that the charges against ESG’s are half-right, and Biden’s efforts to blame Putin maybe a tenth accurate at most.

Let’s deal with the investment issue first, as it directly relates to how Putin’s actions have played out when it comes to energy prices. There is, first and foremost, not a single unified global oil market. Different grades of crude are traded differently. This is both for qualitative differences, but also because fuel is of little value unless it can be moved. For instance, Middle Eastern crude is of less value in North America than it is in Europe or Asia to producers, because it takes longer and costs far more to transport it. The result is that production anywhere in the world is less efficient the further away the customers are.
This is one of the key reasons why Donald Trump’s efforts to build up U.S. (and for that matter Canadian and Mexican) domestic production were so important. It will always be more expensive to import Middle Eastern oil to the U.S. in terms of transport costs than to produce oil domestically. Moreover, because it is more expensive to ship, Middle Eastern (and African) producers will generally prefer customers who are located closer because it decreases transport costs. This preference increases when there are worldwide tensions, because both the costs and risks of shipping a product 12,000 miles are much greater than the risk of shipping it 3,000 miles.

As a result, domestic North American production will always be more reliable. It is not merely the supposed “political dependence” on Middle Eastern oil causing wars which is the issue. When times are bad, Middle Eastern oil (and all oil from more distant sources) will become harder to get.

Ironically, this has shielded the United States from the full effects of Putin’s actions. While prices have increased in the U.S., they are well below those in Europe. In the U.K., the equivalent price for a gallon of gas is well over $8. In East Asia it is above $10. To the extent that Putin’s invasion has mattered, it has been less in directly reducing supplies of Russian oil, but more in the political pressure the Biden administration has brought to bear on Europe to buy more expensive (for them) North American alternatives. This has not just forced prices up in Europe, but by increasing demand for limited North American supplies, it has also increased prices for American consumers. Americans are not paying higher prices because they are unable to buy Russian oil – for the most part they never did. They are paying higher prices because Europeans are now also buying American oil.

This brings us to the issue of supply. If it was possible to rapidly increase output of North American production, this problem could be addressed more easily. Here, decisions by both the Biden and Obama administrations regarding projects like the Keystone Pipeline were harmful. ESG and pressure not to invest in “unpopular” fossil fuel projects did not help. But they were only able to do so much damage because the North American market needs some degree of support to function.

The same factors which make North American oil more “reliable,” in other words more stable in price, also make it less competitive in both global upturns and downturns. Just as distance makes North American oil more reliable in North America, those same distances make it almost inherently less competitive in the global market. It will almost always be cheaper to ship Russian oil to Europe through existing pipelines than to transport U.S. oil to ships in ports, where it will compete with other goods for scarce container space, ship it to ports in Europe (or Asia), unload it, and then distribute it. So, while American prices are being driven higher because Europeans are suddenly buying U.S. crude, an end to sanctions and a resumption of Russian supply would not merely cause prices to drop, but potentially to drop through the floor.

This might sound good but it is not. Unlike a stock, which, if an investor loses money on an investment, they have just lost that amount, with oil futures traders are obligated to take possession of a physical product. If suddenly no one wishes to take possession because the value of the oil is less than the costs of storage, a situation can arise where the price turns negative. Those in possession will have to literally pay anyone with storage capacity to take oil off of their hands. This is precisely what happened in April of 2020, when prices for U.S. crude dropped to negative $28. While all oil prices vary, as the two charts comparing West Texas Crude (U.S.) and Brent (North Sea/Europe) show, only U.S. prices tend to drop into negative territory.

Drops are rare. More than 90% of the time North American oil is profitable, and that stability is an asset, both financially and for national security. But that occasional drop into negative territory is enough to endanger investors, especially if they cannot count either on governmental support (price floors, buying up excess for a strategic reserve when negative) or private loans. Any infrastructure projects such as fields and pipelines require borrowing money. If, due to ESG investing, banks are reluctant to lend, and worse, if when prices drop into negative territory those “negative prices” are used by ESG advocates and governments as “proof” that fossil fuels are going extinct and therefore a justification to let companies fail rather than help them, why would anyone invest?

A real national energy strategy has to embrace the unique advantage geography provides the United States when it comes to energy security. But it has to recognize as well that this advantage comes with the occasional hiccup when left to the market. As a matter of national energy security, governments and the private sector need to mitigate those factors so Americans can benefit from the bounty geography and providence have granted them. If instead they see it as “evidence” they should divest from fossil fuels every time this happens, and it does happen cyclically, we will keep ending up in this spot with gimmicks like the gas tax holiday.

Americans need a national energy strategy. A “gas tax holiday” is not that, but nor is it just focusing on ESGs. It is the attitude behind those actions, which is a failure to understand the nature of the market, and how the world interconnects, that matters, and that has led to the crisis facing the country today.

Daniel Berman is a frequent commentator and lecturer on foreign policy and political affairs, both nationally and internationally. He holds a Ph.D. in International Relations from the London School of Economics. He also writes as Daniel Roman.