Gas Price "Fixes"

I could go off a little bit more about it, but I think it's pretty clear to most people that gas tax holiday is a bad idea and wont fix anything. The media is hammering Sens. Clinton and McCain pretty well and I think most people can come to that conclusion after thinking on the matter a little bit or crunching some numbers for themselves.

I think most people can do the same when it comes to Sens. Obama and Clinton's windfall profit tax, though the media isn't spending as much time with that one. While it's popular to want to stick it to the corporation, I think some reason can figure out exactly what might happen if you try to do it too much to a corporation. I also challenge the spin with raw numbers - and not profit margins - that the oil companies are making so much money. Here's the real scoop:

On average, the profit margin of the oil industry is 8.3%. As a former retail employee in what feels like a past life, I can tell you that a profit margin that low is very atypical. Retailers such as Best Buy or Wal-Mart have massive profit margins on the goods they sell. For example, when working at Best Buy, I found that the cost of a simple printer cable was $1.21. We sold that same cable for $32 to the public, a 2,644% profit margin! Granted in dollars we are talking about profiting only $30 and some change off the cable. But, let’s put it into the proper perspective. With a barrel of oil teetering just over $100, and an average profit margin of 8.3%, the oil companies are making a whopping $8.30 off the barrel of oil! Hardly a wild profit to accuse an entire industry of price gouging over.

Oh, and about that price gouging...some info from FactCheck.org:But what Obama doesn't mention is that the FTC has conducted price-gouging investigations before, most notably in the wake of Hurricane Katrina. The FTC found "no instances of illegal market manipulation" and concluded that the price increases "were approximately what would be predicted by the standard supply-and-demand model of a market performing competitively."

That's not to say that market manipulation (or price-gouging) is impossible. And the FTC, as well as state attorneys general, may well be conducting further probes even as we write this (they're generally supposed to be confidential until they're completed). But most economists say that gasoline prices have more to do with market forces than with oil company shenanigans.

But, let's get past that. Let's try and punish these oil companies because profit is evil and people are suffering. How do we stop their suffering? A windfall profit tax. We've done that before... how did it work that time?

Normally, when you tax something, you get less of it, but Mr. Obama seems to think he can repeal the laws of economics. We tried this windfall profits scheme in 1980. It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3% to 6% and increased oil imports from OPEC by 8% to 16%. Mr. Obama nonetheless pledges to lessen our dependence on foreign oil, which he says "costs America $800 million a day." Someone should tell him that oil imports would soar if his tax plan becomes law. The biggest beneficiaries would be OPEC oil ministers.

Of course, just like the capital gains tax, Sen. Obama is okay with hurting people in the terms of the fairness of hurting the oil companies.

None of these plans actually solve what they say they'll and cause lower gas prices. All are pandering to a group of Americans who want the government to do something. I'm guessing that the government can't do anything to help these prices in the short run. There's drilling and all sorts of other ideas that I might agree to for reasons that have nothing to do with lowering gas prices in the short run and in a separate argument than this one. In an election year a cry for government to do something about something it can't really (and shouldn't really) affect in the short term ends up with government doing something terrible.

Edit: Justin Wolfers at the Freakonomics blog chimes in. Thanks to Brad for the link.