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Gasoline
The case for raising gasoline taxes
Prices cannot be brought down because market tolerance determines the price, no matter who charges it
by Kevin Potvin
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Local corporate media like CKNW and The Province have begun campaigning in earnest to protest what they declare to be too-high gasoline prices. And they hope to translate the public outrage they’re trying to create into pressure on BC MLAs to “fix” the high prices, whatever that might mean. Campaigns orchestrated by major corporate media in Ontario, Quebec and PEI to pressure provincial representatives in those provinces are also underway.
I guess there is no love lost between these paragons of free enterprise and the rights of business when it comes to freedom to drive! How about a campaign by corporate media to pressure politicians to do something about exorbitant home rents, since they lately find it so easy to dispense with the core values of laissez faire capitalism? And whatever happened to the professed objectivity of media, of the principle of staying neutral on all issues?
The throwing-aside of all these guiding principles is a measure of how gasoline and driving alone occupy a pre-eminent role in our society. All principles governing the behavior of media, and all adherence to principles of free enterprise and market economy, are quickly abandoned when the price of gas goes up a dime. We can see thousands thrown out of their homes, the farmers who grow our food go under at a terrific rate, and the environment come to the point of utter collapse, and still free enterprise and the rules of the market economy must be observed über alles. But gasoline for Hummers goes up a bit and all hell breaks loose.
What the gasoline price crusaders don’t acknowledge, or don’t know, is that the same rules apply to gasoline as for every other product made and sold in our economy. If we legislate lower prices so that a gasoline company can only charge, say, 80¢ per litre, but can charge $1.20 per litre somewhere else, guess where gasoline will be sold and where its supply will dry up? Or are these campaigners in the media and in politics suggesting we go whole hog into socialism and force the gasoline companies to sell the volumes of gasoline we dictate to them at the prices we choose?
The campaigners have it all backward. The price of everything, gasoline included, is pegged at the highest point that the market will currently bear for the optimum volume sold. They charge $1.20 currently because we’re willing to pay $1.20 at current optimum volumes. As gasoline becomes more scarce due to peak oil, bidding will drive the price higher. A new level of market price tolerance will be achieved at every new, lower, volume moved. Prices will rise exorbitantly, no matter what the cost of producing the gasoline is. The difference between cost and price is profit, and with current practices, our prices will skyrocket, availability will drop, and oil companies will make—are already making—world record profits.
The only reasonable policy for government is to raise taxes by an amount equal to what oil companies have already raised their prices above and beyond what had already been established as the price necessary to generate reasonable profit. They will then be forced to lower their prices back to what the market will bear for the optimum volumes moved. We will end up paying the same price no matter who raises it, the government or the oil companies, but the big difference is the windfall profits generated by scarcity revert back to us in the form of government revenue instead of to them, in the form of private profits. Income taxes can be lowered or public debt can be paid off with the extra taxes collected, if that’s what we wish to do with our own money.
Here is how it can work: We already know that 70¢ per litre is a price sufficient to generate revenues and profits to keep the oil companies happy and in business. Since prices are about $1.20 now, that means there is a 50¢ premium being collected that goes to excess profit. So, government should increase taxes on gasoline by 50¢ per litre. The cost will initially jump to $1.70 per litre, but gas companies will see that demand has dropped off a cliff, and will lower prices back to the level the market will bear at what they find is their optimum volume, which we know already is $1.20 per litre. We end up with the same price, only the excess 50¢ comes back to us rather than going off to the oil company. If they raise gas 10¢ again because, at new lower volumes, the market will now bear $1.30 per litre, we should raise taxes 10¢ per litre again, making the price $1.40, forcing the oil companies to lower the price back to what the market will bear at $1.30, and we get the extra 10¢ again.
What everyone needs to note is that we cannot make prices go down. If we lower taxes, the same rules about what the market will bear will take effect, and the oil companies will raise prices by the amount we lowered them to achieve the market price again. Whenever we lower taxes on gasoline, we get the same price in the end, the only difference being the oil companies get more profit and our government gets less tax revenue.
To repeat: the price of gasoline is not established by the cost of production, the necessity for profit margins, or by government taxes. It is established solely by market tolerance, and it is always as high as the market—us—will bear no matter what the components of that price are or their relative balance with each other.
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