36 Chambers – The Legendary Journeys: Execution to the max!

April 25, 2011

More Silver Bullets Than The Lone Ranger

Filed under: Curmudgeonliness, Economics — Kevin Feasel @ 11:02 am

President Obama says there is “no silver bullet” which can bring down gasoline prices “right away.”

He is very, very wrong on this.  Let me count the ways, noting any points regarding myths about gas prices:

  1. Reduce federal taxes on gasoline.  They currently make up 18.4 cents per gallon.
  2. Reduce state taxes on gasoline.  In Ohio, these make up 26 cents per gallon.
  3. Remove regulations preventing drilling in the US.
  4. Either go all in or leave Libya; in either event, wrap it up quickly.  Rapier argues that this is not a major mover in prices, and I am willing to concede that, but it does have some effect.  Oil is a fungible commodity, so even though Libya does not sell much oil to the US, US prices are still tied in with global prices.
  5. Remove regulations preventing refinery expansion in the US.
  6. Remove governmental requirements on using Ethanol and required gasoline blends.

You might argue that some of these would not “immediately” reduce prices, but keep in mind that the actors in markets, acting as a whole, are extremely quick and efficient at reacting to information.  Prices change not when an event occurs, but rather when people estimate that an event will occur.  This is why the FOMC and other agencies tend to be mum until they make their decisions, for example.  So a commitment to perform the above actions would cause prices to move even if it takes a bit longer for the event actually to occur.

These wouldn’t cause prices to drop to $1 a gallon, but I was working under the “right away” constraint.  Most of these, if governmental officials credibly committed to following through, would have the effect of lowering gasoline prices immediately.  This doesn’t include long-term changes which would affect long-run supply or demand, but it’s not like there’s absolutely nothing that these politicians could do to reduce the cost of gasoline; they could simply reverse some of their regulations and that would go a pretty fair way.

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