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Biden’s gas tax holiday fails to solve the source of his crisis: Supply

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President Joe Biden appears to have exactly one tool in his presidential arsenal to combat the
current crisis
of his own making, and that is to beg.

Despite deciding to alienate
Saudi Arabia
on the campaign trail by calling it a global “pariah” and snubbing its de facto enlightened despot, Crown Prince Mohammad bin Salman, Biden plans to head to the kingdom next month to beg the crown prince to bail him out by drilling more and bringing
‘s prices down. In a letter last week, Biden also begged domestic oil refiners to produce more product stateside, and after months of dithering, he has now begged Congress to pass a three-month gas tax holiday.

None of these displays of desperation were particularly dignified or useful, but Biden’s gas tax holiday plea proves more than anything that the president either does not understand just exactly why we’re in this crisis or, more likely, does not care to curb record prices sustainably in any meaningful way.

For starters, the impact of the federal gas tax is minimal. Only three states have lower state gas taxes than the federal levy of about 18 cents per gallon, and some, such as California and Pennsylvania, where the gas tax is more than half a dollar per gallon, impose state taxes multiple times greater than the federal fee. Furthermore, the benefit of a gas tax holiday may not be passed on to consumers but rather absorbed as profits by oil companies.

More importantly, the gas tax holiday is a demand-side solution to a supply-side problem. And unlike price spikes in other industries such as durable goods (think big-ticket home improvement items such as new televisions or refrigerators, which saw a boom in interest thanks to more working from home amid the pandemic), the consumer demand for oil is extraordinarily inelastic, or unresponsive, to dips in price.

High oil prices may cause consumers to choose to forgo an annual summer road trip or take an Amtrak or Greyhound, but for most people outside the nation’s major cities, the number of miles a household must drive, and thus the gallons of gas it must consume, is fixed. A commute to work simply cannot become shorter nor can the daily trip to school, and most families will consider other regular trips some of the last items they’re willing to strike from their budgets.

Upper-middle-class families may be able to afford exchanging their gas vehicle for an electric car, but in the short run, that likely won’t assuage the problem. According to Kelley Blue Book, the average new EV costs some $10,000 more than a regular new car, and a 2018 study by the University of Michigan found that the average annual cost of powering an EV was nearly $500, or a little more than half of powering a gas car. Considering that gas prices are up double what they were at the start of Biden’s presidency, the operational costs of an EV may make it a wash over time, but the upfront costs are still extraordinarily onerous, not just because of the supply chain shortages hindering EV supply but also due to the record inflation rates raising prices of everything from medical services to bread.

With such inelastic demand, only one market function can reduce prices, and keep them lower, in the long run: inducing supply. Begging the crown prince might do that. Begging the oil companies probably won’t, and begging Congress to nix an 18-cent tax temporarily won’t do anything at all. So long as Biden refuses to relax the regulatory regime spooking (and, in some cases, legally barring) companies from expanding oil production, the president’s power will prove as impotent as a toddler throwing a tantrum.

If you’re a cynic who believes that, just as Biden beckoned the border crisis by reversing former President Donald Trump’s “Remain in Mexico” and Safe Third Country diplomatic deals, the oil price spike was manufactured to accelerate a great energy reset — well, it’s hard to see what exactly he would be doing differently.

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