Gas Tax Holiday

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President Biden recently proposed a three-month gas tax “holiday” during which the federal government would not collect the 18.4 cents/gallon Federal Gas Tax. Unfortunately, it is unlikely this would cause the price of gas to fall.

Gas prices are rising because of a disruption in supply due to the shutdowns and the Russian-Ukrainian war. The price of a barrel of oil increased by $30 the day the war began. Russia is the world’s third largest oil producer, accounting for over 10% of production. The war and sanctions thus knocked a considerable source of the world’s oil supply offline. U.S. oil production remains 1 million barrels/day lower than what it was in January 2020. Consequently, world oil production has significantly fallen and as a rough estimate, each $10 increase in the price of oil raises the price of gas by 25 cents. U.S. gasoline refining has also fallen by about one million barrels per day compared to January 2020. Thus, it is a reduction in oil and gasoline production that is pushing up prices and causing pain at the pump.

A gas tax holiday does nothing to offset these reductions in supply; instead, it stimulates demand. If the price at the pump falls due to the gas tax holiday, drivers respond to that lower price by driving more and buying more gas. Since supply remains disrupted, demand outpaces supply and the price of gas rises back to where it was before the holiday. Since the gas tax is not being collected at the pump, the oil and gas companies capture this higher price in the form of higher profits. These companies, not drivers, are thus the beneficiaries of a gas tax holiday.

In the May issue of My City, I predicted drivers would see no relief from the oil released from the Strategic Petroleum Reserve (SPR). Indeed, drivers saw no relief as the price of gas rose by $1/gallon after the release began. It will cost the federal government $11 billion, or $90 per household, to replace the 100 million barrels drawn from the SPR since then, and the SPR is now at its lowest level since 1986. Households thus paid $90 for a program that provided no benefit. The gas tax holiday would be the same, costing the Federal Highway Trust Fund, which funds highway repair and maintenance, $10 billion over three months. Like with the SPR drawdown, drivers would see no benefit from this holiday.

Even if the entire amount of the gas tax holiday was reflected in a lower price, which it won’t be, the savings would be insignificant. It would only save a driver who purchases one 16-gallon tank of gas per week about $35 over three months and result in worse roads or higher taxes to replenish the Highway Trust Fund.

Only ending the war in Ukraine and encouraging domestic production of oil and gas will result in lower prices. Until then, expect the pain at the pump to continue.

 

 

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