A Little Love for Big Oil

Oil companies report record profits. Gas is headed towards $4 a gallon. A caravan of more than 100 truckers rallied in Washington Monday to protest diesel fuel prices already over that mark. Across the country, Americans are getting pinched by rising fuel and food prices.

So politicians, as Rev. Jeremiah Wright would say, "do what politicians do." Arizona Sen. John McCain offers up a temporary "gas tax holiday," suggesting the Congress suspend the 18.4-cent federal tax for the summer, at a cost of about $10 billion in money earmarked for highways, bridges and other transportation projects. Not to be outdone, New York Sen. Hillary Clinton instantly agrees, adding she'd replace the money to the highway fund with an excess profits tax on oil companies. Both immediately scorn Illinois Sen. Barack Obama as "elitist" for saying that it is a "bad idea." Now this exchange will be a staple of the talk shows whenever gas prices go up.

Now neither McCain, married into a $100 million fortune, ushered about in his wife's corporate jet, nor Clinton are exactly convincing populists. But McCain knows this is political gold, offering folks "a little bit of relief so they can travel a little further and little longer and maybe have a little bit of money left over to enjoy some other things in their lives."

Only there's one small problem with this tax cut: The oil companies are likely to pocket most of it.

Rising demand for gas and oil has driven prices up around the world. In this country, the oil companies say their refineries are pumping out as much gas as they can, so prices are likely to rise even higher this summer as Americans set out on family vacations. They can sell all the gas they can produce at $3.50 to $4 a gallon, including the 18 cents in gas taxes. So McCain and Clinton revoke the gas taxes. Is there any reason to think that the oil companies won't continue to sell their gas at the $4 a gallon that it already commands, and pocket the difference?

Economist Dean Baker of the Center on Economic and Policy Research calls it a "summer tax break for Exxon," [1] noting, "We have a fixed amount of gas entering the market, the question is simply what price clears the market. If we reduce or eliminate the gas tax, the price doesn't change, the lower tax will simply allow Exxon and other oil companies to keep more profits."

This is economics 101, a subject that McCain admits [2] is "not something I've understood as well as I should." (He later denied making the statement.) Obama isn't an economist either, but he's had experience with gas tax holidays in Illinois. As The Washington Post reports [3], Obama voted for a six-month suspension of Illinois' gas tax in the summer of 2000 when prices soared to a then-obscene $2 a barrel. The state lost about $175 million in revenue; the price of gas fell by an average of 3 percent, suggesting that about 60 percent of the savings were passed on to consumers.

But any increased demand that might have resulted in Illinois from cutting the tax could be accommodated by transferring gas from another state. In a federal program, any increased demand from an initially lower price would drive that price back up to its current market clearing levels. There are only two ways to lower the price—increase supply or decrease demand. McCain and Clinton's tax cut would do neither of these.

That, of course, won't stop either of them from peddling the tax and from scouring Obama for being "out of touch." For Clinton, this is just part of the "kitchen sink" she's throwing at Obama. For McCain, inconvenient truths don't seem to matter. He knows what he thinks and doesn't want to be confused with facts. Capital gains tax cuts always generate more revenue. Al Qaeda is the biggest threat in Iraq. Corporate trade deals don't hurt wages. Privatization of Social Security will make seniors more secure. And don't worry, big oil won't charge what the market will bear for the price of gas.

A version of this post appeared on HuffingtonPost.com [4].