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

Posted on Friday, June 24, 2022
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by Daniel Berman
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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.

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Hal
Hal
1 year ago

The exorbitant increase in inflation is 99.9% the result of Joe Hidin’ Biden and the DemocRat Party. The have caused this to come about with out-of-controlled spending and killing American ability to provide for its own needs economically. It’s a fact-of-political-life >>>> the core of inflation lever is intimately tied to National Governance policies controlled by the Fed Government. It is a way to tax the citizenry sub rosa. And the American citizenry is swallowing it like forced-down poison latrine water. I’m highly concerned that if the Biden and DemocRat governance continues to control the economy, a 1930’s depression era will follow soon.

JEFFREY JONES
JEFFREY JONES
1 year ago

SAVE THE U.S.A…..ARREST all demonrats, commies, and other America haters!

David Mansfield
David Mansfield
1 year ago

Democrats are generally economic illiterates. They prove it daily with the statements they make and the legislation they promote and enact. This is yet another example.

Pastor K. Glenn Koons Katy
Pastor K. Glenn Koons Katy
1 year ago

Wow. In just a few days, the wonder of the Trump decisions on SCOTUS picks has restored what the Const. really says. The 2nd Amend.is clear. Libs hate that. There is not one word on abortion in the Const. Lib Dems hate that and outslde the SCOTUS now are signs saying , Rid the US of those mother………..Such nice lingo from the Left Dems huh? Gun rights were preserved tho naturally the Dems in Congress with 14 Pubs in the Senate and House went along with the new gun law which will satisfy only the liberal lunatics. Oh and the Left promises a Night of Rage tonight. Wonder if Joe and Garland will react? As a senior 83 yrs. old retired college prof and pastor, I pray I can make sure to vote in Nov. tho we live in the Soviet State Of Ca. LOL

Steve Weidert
Steve Weidert
1 year ago

Does Joe Biden even know what year it is?

Barrett Smith
Barrett Smith
1 year ago

Biden is resorting to political gimmicks as he has no actual solutions.

Deploreable Sam
Deploreable Sam
1 year ago

Time and time again, fiden has proven himself and his administration to be clueless.
This fool couldn’t find his ass in a closet with the lite on and searching with both hands.
fjb etc etc

Myrna Wade
Myrna Wade
1 year ago

The politicians who depend on emotions for votes take advantage of being in a situation in which they know another branch of government will not be influenced only by emotions to make a statement knowing they never have to make good on it. Therefore, Biden can speak out for a tax holiday and know that congress is not going to send a bill to him for signing.

He can also ask Congress to pass a law to take the place of Roe vs Wade and not expect to see any such law because it is not constitutional.

Biden is struggling to look relevant so he can sign whatever congress can pass before the midterms. Thank goodness quite a number are running for re-election and can’t just do anything.

BAE
BAE
1 year ago

President Joe Biden did this. He made the gas prices what they are today. No excuses, he did it!

Stephen Russell
Stephen Russell
1 year ago

Open up the pipelines, fracking, drilling, Nuclear

Casey C Matt
Casey C Matt
1 year ago

Whoever the real President is he/she/they are evil…..pure evil. They relish in the suffering of “the Deplorables” and have no care for rising gas or food or utility costs………not a bit as politicians steal such a high income from insider trading and kickbacks from industry and lobbyists……….inflation is a healed pimple to them.
The people need to think about when the time is right to use the Second Amendment for its intended purpose and that is to fight tyranny both at home and abroad. Tyranny currently has its base in our own government.

Richard charles riggle
Richard charles riggle
1 year ago

the so called leader of this country and all his dumbass party members are the reason we are in this mess to begin with. He is nothing but a son of a bitch, dumbass.Him and his other dumbasses have been in Washington d.c., and have done nothing but all most ruoin this country.he needs to be impeached right after the next elections.

Centurion
Centurion
1 year ago

All that oil released from the strategic reserves did not do anything. Haven’t heard anything. Is it still being released?

Sean Richman
Sean Richman
1 year ago

This thing that the democRATS are doing means absolutely NOTHING.I live in the very corrupt state of Illinois.We,or the people that voted for democRATS have a governor,and a president that are totally screwing the AMERICAN people.But in sloppy joeys case he is totally unaware of where he is,soros and nonobama are controlling him,but pritzker has no excuse for what he and his chitcago hoodlums have done to our state.

jocko
jocko
1 year ago

ALL libs=CANCER

Tom Fargher
Tom Fargher
1 year ago

The elephant in the room that no one is talking about, refining capacity of the crude. Oil companies are producing at near 100% and not enough to meet current demand. The last new refinery went into service in 1977, and in the last year alone, 5 refineries shut down, reducing the total capacity by 5%, at a time where demand has increased. With current environmental regulations it will be nearly impossible to build another and the ones we have are getting OLD!

Dr.Zorro
Dr.Zorro
1 year ago

Wow! This “gas tax holiday” will be a great savings of? Thanks, Joey, for closing the pipeline and buying oil from Dictators at a high price. We need a permanent holiday from you and your corrupt regime.

James J
James J
1 year ago

so sick of this Communist Idiot do ray me fa q biden

Larry W
Larry W
1 year ago

Biden insults the American people’s intelligence every time he speaks. Biden’s policies have doubled the price of gasoline and he wants to lower it by 18 cents a gallon. This man has no business being the president. He has no respect for the hard working men and women of this country. And he has no idea how to help the people he is supposed to serve. Or maybe he doesn’t have any desire to serve.

Steven Tapper
Steven Tapper
1 year ago

The idea of a Federal Gas Tax Holiday is totally reactionary and a knee jerk reaction to the outrage over gas prices which are currently around $5 a gallon.

This whole “New Green Deal” was never thought through properly. It’s purpose was to make gas more expensive to close the gap between gas powered vehicles and electric vehicles. Right now the average cost of an electric car is roughly $60 K versus $42 K for a gas powered vehicle.

Not figured into this calculation is that the infrastructure to have enough charging stations nationally and having electric car owners foot the bill to add a charging station at their home is going to take several decades at least.

Also noteworthy is that the government is using the pretext that electric cars are environmentally good for Mother Earth and that fossil fuels are dirty and environmentally unacceptable. First of all every modern vehicle produces very little carbon dioxide and other pollutants as they meet extremely rigid EPA and CAFE requirements. What the Administration and Media is not telling us is that the power plants producing the electricity for these electric cars use fossil fuels such as coal, natural gas and nuclear power. Using inefficient windmills or solar power isn’t an option.

Shutting down the pipeline and not allowing for drilling in known oil fields such as Alaska and offshore have crippled our capacity to produce and deliver adequate supplies of oil to the dwindling number of oil refineries still operating. This was done intentionally by Biden/Obama and the negative effects it is having on our economy and the pain it is causing American families with the rising costs of everything is moving us into a Recession if we are not already there.

This gas holiday may not even give the poor American consumer the benefit of the price cut because there will be dealers and distributors who will not pass on the entire Federal Gas Tax to the consumer.

Enuf Said
Enuf Said
1 year ago

Americans do not want to get oil from foreign killers-they want oil from AMERICAN DRILLERS! Well, with Biden’s HOLIDAY- you can save $3.60 on a 20 GALLON fill up– not enough to even buy a gallon of gas. Wonder how much loss of tax revenue this HOLIDAY will be! The Dims are masters at spending MORE than they bring in–ALL of them have champagne tastes and BEER INCOMES!!

Rich
Rich
1 year ago

You can explain away the crisis with your PH.d education but the bottom line is I know what I was paying for gas on the last day of President Trumps administration and I know what I am paying now. In any market, as soon as there is more product on the market, prices start to stabilize and come down. I would rather buy ANY product made in America than another country. The socialists hate making America great again. It just doesn’t fit with their globalist agenda. As far as the democrats “tax holiday”, it should be part of April fools.

Karen
Karen
1 year ago

More ridiculous ideas of the Biden administration. Thanks for nothing Joe.

Jmcnatt
Jmcnatt
1 year ago

This gas tax holiday is a joke, just like our President.
I’ve read all these comments and the best way out of some of these problems is to VOTE in every election and try and rid this country of the deplorable Democrats. Nancy P and her puppets should have been gone long ago and as for Biden, well they stole that election and no one has the guts to stand up and defend Trump. Our country was finally headed in the right direction and we are back in the bottom of the barrel drowning. Other countries are laughing at us.

Patty
Patty
1 year ago

Joe is largely brain-dead & has NEVER actually been a ‘good’ representative for his constituency. But I guess those fools kept re-electing him???????
President Trump had our nation on the right track. And he did it with both of his hands tied by his idiotic opposition!
I voted for him because he was NOT a politician, but a successful business man who had ‘earned’ his wealth, who did not need to ruin his life by jumping into the DC cesspool & try to put in policies which would save our nation from the enemies within … ( unlike “lifetime politicians” who without the slightest iota of conscience or shame, continually profit personally, while claiming to represent the will of “We, the People”. Most of them are thieving “demagogues”!! )
If you don’t think we are worse off as a nation with the current DC dictator heading our country, you too are a hopeless fool.

Susan
Susan
1 year ago

What about the record profits, in the first quarter of 2022, the top 5 oil industry majors (Shell, Exxon/Mobil, ConocoPhillips, BP, and Chevron) are still raking in on the backs of the American consumer? The elephant in the room…

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