The lead article in the September 10th Money Section of USA Today was a brief synopsis of the candidates policy positions on energy related issues entitled: To win the presidential race, it takes energy: What the candidates think about the top 6 energy issues. I am going to assume that the paper has its data correct and provide a scorecard for both candidates on the issues.  Only one candidate can win each section, although notable policies of either candidate will be mentioned in the conclusions.

Part 1-Drilling

Part 2 - Electricity

Part 3 - Global Warming

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Price Relief

Obama

  • Wants to provide a $500 tax credit for individuals and $1000 to married couples filing jointly to help the rising cost of gasoline, heating oil, natural gas, etc.
  • The tax credit would be paid for by a “windfall profits tax” on oil companies.
  • Advocates the removal of 70 million barrels of oil out of our strategic oil reserve to help reduce the price of gasoline.
  • Opposes the temporary repeal of the federal gasoline tax.

McCain

  • Advocated for the temporary repeal of the federal gasoline tax this summer, but that proposal has been tabled by the campaign.
  • Opposes the windfall profits tax on the grounds that it would “discourage investment”.

Conclusion:  I literally rolled my eyes when I read the heading of this section in the paper:  Price Relief.  The price system in a free market system is a truly remarkable thing to behold.  It manages to balance consumers needs and wants with the exact amount of supply needed to fulfill the demand.  If the price is too low, then suppliers ease back production (since they are not making as much money as they want) while consumers queue in line to grab the hot commodity before its gone (creating a shortage).  The price creeps upward until demand matches supply.  If the price is too high, suppliers overproduce the product (trying to reap all the profit contained in that high price) while consumers turn up their noses at the high price (creating a surplus).  The price creeps downward until demand matches supply. (I won’t even go into the remarkable beauty and mystery of the signaling function of prices.  I get choked up just thinking about it.)

McCain gets the Miss Congeniality prize in the ugly economics pageant.  Obama is exactly right about a tax gas holiday.  It’s a stupid idea.  Assuming that you want to tax gasoline (and there are good economic reasons for wanting to), then the effect of a tax gas holiday would be, very little consumer relief, no government revenue and more profit to the oil companies.  The reasons are counterintuitive but true:  price is relatively unaffected by the cost of its inputs.  The day after the holiday took effect, the price would be about at the same level it was the day before.

But if McCain was Miss Congeniality, then Barack Obama is the grand prize winner in the ugly economics pageant with his rendition of All Mixed Up.  As I said in a previous post:

I was operating under the assumption, until recently, that Obama was pretty smart and understood how the world works.  Naysaying a gas tax holiday.  You Go O!  Then in a populist proposal of astonishing stupidity, O goes off the rails.  “Gas prices are up.  People are hurting.  Tax the windfall profits of the oil companies (and what exactly is a windfall profit) and rebate $1000 to those hurting Americans.”  Just ignore the fact that even O can’t change the laws of mathematics and his math just don’t work.  What is the effect of decreasing the supply of oil (taxing oil profits) and increasing its demand (rebating money to Americans)?  Anyone?  Anyone?

(PSST: the answer is “It will make the price of gasoline go up”.)

The idea behind a windfall profits tax is incredibly dumb.  What is a windfall profit?  Economists can’t figure out a way to define it.  Is it profit margin in excess of X amount?  Why is it X and not Y?  If it is X, are you going to tax all industries with a profit margin of X or higher?  That means you are going to tax the banking industries (until recently) and the pharmaceutical industries too both of which boast higher profit margins and higher return on revenue.

Coincidentally, McCain is exactly right that a windfall profits tax would “discourage investment”.  And this discouragement is another factor that would lead to higher prices at the pump.  In the oil and refining industries, investment means looking for new sources of oil.  Oil discovery is an extraordinarily risk business.  It’s also high reward.  If profits are taxed, investors will turn toward other industries with more promising potential returns.  Supply is dampened and prices rise.

Point:  McCain

Steve

PS I am neutral on the use of the oil from the strategic petroleum reserve.  It is impossible to predict its affect on the price.