Recently in Canada there’s been a huge uproar about the price of gas, especially after Katrina caused gas prices to go up a further 20 cents per litre. A lot of people have called for the taxes on gas to be lowered to help consumers out. However, I really don’t see how that can actually help. Here’s my argument:
Right now, Canadian refiners are operating at their peak output levels – they simply can’t produce any more gasoline. Just for the sake of the argument, let’s say that output level is 2 million litres of gasoline per day (2 ML/day). The price of gasoline paid by consumers(that is, the price recieved by producers + the gas tax) will have to settle at the number that will force Canadian demand for gasoline to be 2 ML/day. If the gas tax were lowered or eliminated completely, initially the price paid by consumers would drop. However, then demand would rise beyond 2ML/day, and so the price would have to rise again, until it settled back at the original price. The net effect would be that the producers would be making more money at the expense of the government, while the consumers wouldn’t be any better off.
The only hole that I can see in the argument is the fact that I’m assuming that the supply of gas here in Canada can’t increase. Is this correct? Or have I made a mistake somewhere else?
Well, IANA petroleum products economist, but the biggest flaw I can see in your reasoning is that demand for gasoline really doesn’t change that much in response to the price. People still need drive to work everyday and to the store, etc. And how many people do you really know who decide not to go to the movies today because gas prices have risen?
On the other hand, a real concern is what kind of taxes are going to replace the gasoline tax? It’s not like the government just stops paying for roads (and everything else it does) when you cut the gas tax, so where is that money coming from?
They do, but their strategies may well be affected by their costs. Carpooling starts to look a lot more attractive. Ditto for planning more carefully so as to reduce the number of trips to the store.
Longer-term, you’ll see people putting more emphasis on finding a home near their work (or vice-versa) and buying more fuel-efficent vehicles. I know two guys who have been dusting off old mopeds they last used some years ago.
I think the beef is that GST on gasoline is charged as a percentage of the retail price. When a crisis hits and gas doubles it’s wrong for the government to reap a windfall. I suspect if the feds lowered the tax (hahahahaha) big oil would somehow reap the benefits. Either way you get fucked, it’s just a matter of who’s your daddy.
Most of the recent price hike is due to gasoline futures soaring because the market is afraid of shortages, and not due to real shortages. As refineries in the hurricane zone are coming back on line, it’s beginning to look like we might avoid real shortages.
The gasoline market is continent wide, so dropping Canadian taxes would increase demand in Canada, but the resulting price increase to regain market equilibrium would be spread across all of North America. So, prices in Canada would only (theoretically) regain ~10% of the lifted tax rate.