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The · Psychohistorian

Global economics

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More and more people seem to understand the basics of economics - what a supply curve is, what a demand curve is, and how they interact. Gasoline prices go up, and some people trade their Hummers for Minis, reducing the demand - that's the demand curve at work. At the same time, Any idle oil wells or refineries may be pressed into service to increase supply - that's the supply curve. And when people do switch to Minis, the reduced demand causes the price to go back down - or at least not to go up as fast.

Thus it is that when some people propose a gasoline tax "holiday" to take the edge off the current price increases, people view the proposal with skepticism. They recognize that removing the tax won't just cut the price by the equivalent amount. A reduction in price to the consumer will cause more consumption, and to increase production to match, the producers will need to see an increase in the price they can charge. The suspicion is that suspension of the Federal gasoline tax will cause as much of the money to go into the oil companies' pockets as into the consumers', if not more.

That's not a complete picture, though. The thing to keep in mind is that the U.S. Federal gasoline tax only affects the U.S. - and the U.S. is only a small fraction of the world oil market, not a complete market in and of itself. Suspension of the gasoline tax would only increase demand only in the U.S., and supply adjustments would be distributed throughout the world. It's actually likely that most of the lost taxes would go to U.S. consumers. The oil companies would still make out, though - they'd just get to charge slightly more to all of their customers, including the non-U.S. ones. It's the consumers in other countries that would pay for it.

Keeping the global picture in mind is also important when assessing other possible government actions. For example, opening the Arctic National Wildlife Refuge to oil drilling - as advocated by Vice President Cheney, among others - would substantially increase the U.S. crude oil production capacity. This oil would be sold into the global market, though - even if it were shipped to U.S. refineries, it would act as part of the global market by displacing oil imports - and it would be a much smaller fraction of that global market. Any lowering of prices would primarily benefit consumers in other countries, and that lowering would be much smaller than one might conclude from analyzing the U.S. economy in isolation.

Obviously there are also many policy considerations that ought to be considered when making these decisions - for example, whether lower gasoline prices are actually desirable. Any decision, though, should be based on realistic expectations of the actual economic impact of a decision. If we forget to include the international repercussions of such decisions, our expectations won't be realistic.
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[User Picture]
On June 3rd, 2008 09:07 pm (UTC), greyautumnrain commented:
Sadly, the impulse of politicians seems to be to the do the stupid ineffectual thing rather than leave well enough alone.
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[User Picture]
On June 4th, 2008 12:31 am (UTC), twe commented:
I don't think anyone really trades their *Hummer* for a MINI. Maybe for a Hybrid SUV. ;)
[User Picture]
On June 4th, 2008 02:20 am (UTC), psychohist replied:
Hey, it made a good verbal picture.

I do know someone who traded in his Ford F-250 for a Mini when gasoline prices first peaked at $3 a gallon a few years ago.
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