How THe FED, and Federal & State Taxes Drive Up Gas Prices

[PierzStyx]

Written Testimony of

Robert P. Murphy, Institute for Energy Research

Before the Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending

On the Matter of

“How Federal Reserve Policies Add to Hard Times at the Pump”

May 25, 2011



1. About IER

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

Founded in 1989 from a predecessor nonprofit organization, IER is a public foundation under Section 501(c)(3) of the Internal Revenue Code and is funded entirely by contributions from individuals, foundations and corporations. Headquartered in Washington, D.C., IER supports public policies that simultaneously promote the welfare of energy consumers, energy entrepreneurs, and taxpayers.

2. Robert P. Murphy Resumé

Robert Murphy earned his Ph.D. in economics from New York University in 2003. From 2003 – 2006 he taught economics at Hillsdale College. After three years teaching, Murphy left academia for the private sector, taking a job with Laffer Investments, headed by Arthur Laffer of “Laffer Curve” fame. In this capacity, Murphy maintained and improved stock selection models, and also helped write research papers for clients. One of the Dr. Laffer’s main interests in this period was oil prices.

In the summer of 2007 Murphy joined IER as an economist. His academic research has focused on climate change economics, specifically the proper discount rate to use when evaluating mitigation policies. He has also given several public presentations on the oil industry, dealing with such issues as record oil prices, windfall profits taxes, and offshore drilling. In addition, Murphy has prepared studies for IER dealing with oil and food prices, the effects of ethanol on gasoline prices, and the role of institutional speculation in oil prices. Murphy previously testified (having been invited by Dr. Ron Paul [R-TX]) on the connection between the weakening dollar and oil prices on July 24, 2008.

3. The Causes of High Gasoline Prices

Although gasoline prices are still below the record levels (not adjusting for price inflation) set in the summer of 2008, they have been higher in the early months of 2011 than ever before:

Gasoline prices are driven by a few major factors, as the following chart from the Energy Information Administration (EIA) illustrates:

If policymakers want to reduce prices at the pump, the two most relevant components of gasoline prices are federal and state taxes, as well as the price of crude oil. Federal policymakers clearly have the ability to lower the federal tax of 18.4 cents per gallon, while state officials could lower the respective fuel taxes in their jurisdictions. This would provide immediate relief at the pump, though depending on (what economists call) the relative elasticities of supply and demand, not all of the tax reductions would be passed along to motorists. For a purely illustrative example, even if the 18.4 cents per gallon federal tax were completely eliminated, the price at the pump might only fall by (say) 10 cents per gallon, meaning that retailers would earn an extra 8.4 cents per gallon themselves.

Moving on to the price of crude oil, at first it might seem as if federal policymakers have little influence on a commodity traded in the world markets. However, by expediting the development of offshore and other mineral resources on federal lands, policymakers could signal an increased future output of crude oil which would actually reduce prices even in the present. For example, when President George W. Bush announced in the summer of 2008 that he was ending the executive branch’s moratorium on offshore drilling, the price of oil dropped $9 during the speech itself.[1]

In addition—and of more relevance to this hearing—the Federal Reserve has a tremendous influence on the value of the dollar and the financial markets, and as such may have played a significant role in the sharp run-up in crude oil prices over the last few years......."

More at the link: http://www.instituteforenergyresearc...nergy-markets/

[Zippyjuan]

The Federal gasoline tax was last raised in 1993. http://en.wikipedia.org/wiki/Fuel_ta..._United_States

The federal gasoline tax raised $25 billion on gasoline in 2006.[4] The tax was last raised in 1993, and is not indexed to inflation. The federal gas tax has experienced a cumulative loss in purchasing power of 33 percent since 1993. An increase of 10¢/gal would bring approximately $20 billion of annual revenue into the Highway Trust Fund.

That means that it should not have contributed to any rise in the price of gas since then.

From the link:

There are two main routes through which Fed policy could have influenced oil prices (quoted in dollars). First, the Fed could have caused the dollar to depreciate against other currencies. Second, the Fed could have raised the price of oil relative to most other goods and services. In the remainder of this written testimony, I will first lay out the extraordinary interventions of the Federal Reserve in the wake of the financial crisis, and then turn to each of the two possible connections to oil prices.

The Fed can do the first part- devalue the dollar- but they cannot do the second- target the price of any one thing such as "the price of oil relative to other goods and services". They can change interest rates and they can buy things like US Treasury notes and Mortgage Backed Securities but these actions do not specifically impact any one industry or commodity- such actions impact all prices.

The article does point out:

However, it is very difficult to isolate just how much of the price hike can be explained by Fed policy, versus “fundamental” factors such as the fall in Libyan production and the increasing oil demand from emerging markets. Absent very reliable worldwide data on inventory accumulation, the relative influence of monetary policy versus “real” factors specific to the oil market cannot be precisely quantified.

[sluggo]

Here in NC, state gas tax is around 40 cent per gallon. The feds get another .18.And people bitch about oil company profits.