What is Driving Gasoline Prices?

It’s been a while since I drew a few charts based on this source but Menzie Chinn got my thinking:

I have been puzzled by the proposal for a tax holiday for gasoline purchases running from Memorial to Labor day … with the objective of spurring the economy. First, the Federal tax is quite low, either in real or in relative terms. Second, the benefits that would accrue to consumers are probably pretty small, under reasonable assumptions … In relative terms, the total Federal tax has been shrinking as a share of gasoline prices, as gasoline prices have headed north (March = $3.293, all grades, inclusive of taxes). As of March 2008, the Federal tax accounted for 5.6% of that price.

Even total taxes accounted for less than 13% of the price of gasoline. Even if one added in the gross margins for the refineries and distributors, the non-oil share is only 28%. Yep – of the current $3.24 per gallon price you are paying (on average), $2.33 is going to the owners of oil. It hasn’t always been this way as our graph shows. The oil share had fluctuated around 50% being as low as 35% at one point but since last summer, its share has dramatically increased. Our second graph shows that spikes in the refinery margin have been responsible for some of the past gasoline price increases but currently this margin is the same as the distribution margin or $0.26 per gallon.

A cut in the gasoline tax will not necessarily reduce the price of gasoline all that much as we have argued that the incidence will largely go to the suppliers. Menzie also notes the incidence of the tax logic but he argues that about half of the benefit might accrue to consumers. Menzie still argues:

So this is the measure to jump start the economy? I think this measure would give relief to somebody. But I also think it’s a pretty blunt instrument by which to provide assistance to the driving public, or consumers, for that matter … Oh, and by the way, to the extent the lower price spurs gasoline consumption, this should increase the petroleum and petroleum products component of U.S. imports, and thence putting further upward pressure on the price of oil

In other words, this is not exactly the best use of fiscal policy to stimulated aggregate demand.