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NOTE The Path to Lower Gas Prices: Free Trade

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This is Jeff Tucker with the Mises Org pod, and I'm here with Robert Karl Mirting, who is an economic student at Wofford College, and he's written a daily article on gas prices.

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The whole article came as quite a surprise to me. I had no idea who's working on it. And as far as I can tell, it's a completely novel explanation for the high price of gasoline, not so much the rise, the recent rise, right, but just the high price.

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Rise in general.

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Yeah, just the rise in general, right.

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And, well, why don't you state your thesis just up front and then we can talk about some of the background.

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All right.

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Well, we were looking into how government has caused price increases through taxations of various sorts

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and discovered that the tariff on gasoline is ten times that on oil.

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And so therefore, government is actually discouraging the importation of gasoline,

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The Theory of Money and Credit

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I first looked into the refining industry and discovered the regulations on it were so high that it was very unlikely to be profitable. And then further investigations showed that it's propped up by the tariffs because offshore refineries cannot just ship gasoline into the United States at a fair market price.

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Yes.

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Yeah.

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Well, okay.

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Then let's go through some of the background then first.

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Let's review some of the taxes that are currently driving the price of gasoline higher than

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it otherwise would be.

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Go ahead.

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Well, the excise taxes, which the federal excise tax is about 18 cents on a gallon.

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So add that to the top.

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And then there's state excise taxes, which vary widely from less than 10 cents to over

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40 cents.

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Average across the nation is about 42.5 cents on a gallon of gasoline excise taxes, and the tariff on top of that adds another penny and a quarter.

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So we're talking at least around 43 cents on a gallon of gasoline, which at a price of about $2 a gallon is 22% tax.

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Yeah. You know, the whole subject of gas taxes is remarkable because, you know, every time we go through one of these bouts of a price increase,

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You know, you tend to take notice of these taxes and say, well, look, if you want to drive down the price, a good way to do that would be to reduce the tax.

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But then immediately the cry goes out, no, that would be terrible because...

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Well, the argument is that we would use more gasoline and global warming and put too much wear and tear on the roads and so forth.

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So you get some sense that there's an ambivalence about the social value of low gas prices versus high ones.

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This really is a political debate, isn't it, about whether we should be consuming as much as we are?

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Yes, sir. It's a political debate, and we have oil on one side, environmentalist groups on the other.

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Where exactly their interests lie is not always clear.

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Right, now how does the windfall profits tax issue figure into this, which you mentioned

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pretty much at the beginning of your piece?

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That is Congress's idea to take care of the obscene profits made by oil companies.

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What they fail to look at is that in the past 25 years, the amount of taxes paid by the

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oil companies is three times their net income during that same period.

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So the obscene profits are already being made by Congress.

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But the oil companies are making very high profits.

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They're doing very well recently, but in the past they have not done so well.

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And the whole idea of the windfall profits tax is just simply to, well, Congress knows

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where the money is and they want to get it and that's...

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Yes, they found a deep pocket to pick.

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Yeah, yeah, that's right.

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Okay, so why don't you continue with your argument concerning refineries?

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Well, we have refineries, as Katrina pointed out, located in very few places, very high concentrations.

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And there's a good question as to why, but new refineries haven't been built in the United States since 1976 due to environmental regulations.

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And since 1981, the number of refineries have actually continually dropped.

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And it's disappointing that when we rely so much on gasoline as a country to operate,

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we can't increase our production of it.

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I mean, it's just a remarkable fact, isn't it?

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Do you have any data on how much consumption has gone up since 1976?

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I mean, it's remarkable to think there hasn't been any new refineries built since that time.

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I know that our capacity in 1985 was equivalent to our use of oil on a daily basis and since then we have not been able to refine as much oil as we need daily and have to import finished products.

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How does the argument, the political argument about drilling rights and federal lands figure into this? Is that at all related?

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It is related, especially when it comes to profits of oil companies, but the amount of

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oil right now is at a level that is working with, for the refineries. Increasing the flow

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of oil to the refineries is not going to increase the flow of gasoline.

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Yeah, so that's really remarkable. Well, where's the, where's the move to then, now are you

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certain that the reason there aren't more refineries is entirely environmental regulations?

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I mean, are we certain of this?

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We have every reason to believe it, because there's so many restrictions that must be met,

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it's easier to meet those restrictions on one large refinery than on multiple little ones.

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And since little refineries having to go under the same screenings and testings

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and deal with the same amount of paperwork as a large refinery become unprofitable.

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So all small competitors are squeezed out of the market.

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Right. Which to some extent is in the interest of the existing refineries.

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is definitely in their interest. The larger refineries become larger and control a higher market share.

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I mean, if Auburn only had three pizza joints and the same three since the mid-1970s,

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you could see why they would favor some restriction on this.

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So is it this question then that led you to the issue of the differential in the tariff ratio,

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We suspect that the refining industry was looking for protectionism in one way or another and having gotten at home with the practical ban on the construction of refineries, they were now seeking it abroad and preventing gasoline from being brought in to compete with what they were making.

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Yeah. But do you have any legislative background on why the tariffs are different?

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Not legislator background. I have not found what Congress deemed to be their reasoning behind it.

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But the tariff was actually passed as of 2005. So it would have been passed in 2004. So it's recent.

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Which tariff? The gas tariff?

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The gas tariff. It was enacted in 2005, January 1st. So that'd be

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What was the rationale for it?

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I just found the reporting of the tariff itself.

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I did not find the bill in which it was attached.

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So we have no idea why there would be.

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Now on the paper it looks as if the tariff is not that high.

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Explain why you think it matters then.

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Well, the tariff is 52 and a half cents on a barrel of gasoline. But on a barrel of oil, you're looking at five and a quarter cent. So that's a difference of ten times.

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It comes up to about a penny and a quarter on a gallon of gasoline. And using the elasticity of demand for gasoline, without the tariff, we'd have about a penny difference on a gallon of gasoline price-wise.

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Which considering that Kenoko Phillips made 9 cents on a gallon in the past quarter of 2005, that comes up to an increase in profits from 8 cents to 9 cents, which is a 12.5% increase in profits for the refinery industry.

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Right. Now, from the consumer point of view, this doesn't sound like a lot. So why do you think then a lowering of the tariff would make a difference at the pump?

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I think would bring back some competition, and it may not look like a lot of money only on a penny a gallon, but when we're consuming on a daily basis about 9 million gallons of gasoline, it adds up very quickly.

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Yeah, and we don't know what kind of technological innovations or other kind of efficiency improvements

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would result from a more competitive market or refineries.

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Yes sir, nobody can tell what technologies will come up as a free market.

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Well, now do you expect that eliminating the gas tariff itself or at least lowering it down to the same level as oil isn't going to by itself make the industry more competitive?

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You still have to address the issue of the regulations, right?

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Yes, the regulations are the larger question and they're the more complicated question.

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Why are they complicated?

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is how much sacrifice do we want to have in productivity for protection of the environment?

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How much of it is overkill? How much is not?

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And it's a balance there between the environmentalist groups and the total free market aspect.

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And while I lean towards complete free market, the general American public would likely see some protection of our air quality.

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Yeah, right. Sure, yeah. And yet, the consuming public prefers the price of gasoline to be zero.

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As low as possible. Just pass it out for free.

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Now, of course, I'm sure that the irony might have struck some listeners already that what you're essentially arguing is that the green lobby is working,

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whether explicitly or not in the interests of the large well-established refineries.

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Their interests have certainly lied together recently since the green lobby has prevented new companies from coming in and made small companies unprofitable.

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This has allowed large companies to take over many old refineries, which is the only way to expand if you can't build new ones.

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and Arizona Clean Fuels is a company that's trying to construct a new refinery in Arizona and has been in legal battle since 1999 and no progress yet to date.

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Yeah. You mentioned something in the article about a Saudi Arabian company.

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Saudi Arabian Company, mainly to make jest at the American's laws, offered to build two refineries completely at their expense to operate inside the United States if somebody else would require all permits.

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Yeah. And that offer hasn't gone very far.

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It went nowhere. It fell on deaf ears.

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Yeah. From whom would U.S. consumers be buying gasoline if the tariffs were lower?

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Most likely Venezuela. They are one of the closest providers of our oil and they have a lot of refineries themselves.

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They've made many complaints on the regulations that America replaces on their refineries so that their gas can be brought in.

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Yeah, and these complaints have been made through the World Trade Organization.

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And is there any sympathy at the WTO for this kind of strange form of protectionism?

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I mean, for repealing the protectionism.

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The WTO has not really come forth with strong statements.

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It tends to be supported for the most part by America, so it's kind of the fox watching the chicken house.

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Yeah, I guess the path to free trade is always a very difficult one. A constant struggle that's been going on for, well, since I guess the beginning of time.

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Since the first bit of trade.

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Since the first bit of trade, yeah. Among all the books that, all the references you looked at, what kind of read, what kind of sources would you recommend to listeners to get up to speed on the question of energy economics and some of these kinds of issues?

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There are a good many newspaper articles you find that cover what's happening currently with the bills and so forth.

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There are a few academic articles that will give a better history and more statistics.

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Many of them criticize the oil industry, a few of them criticize the government,

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but almost all of them have something in there about the regulations and them preventing new construction.

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Yeah, it's interesting, isn't it, how you're making an economically sophisticated argument

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that is pro-free market, but also drawing attention to the ways in which environmental

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lobbyists, large corporations, and the government kind of work together to serve themselves

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at the expense of the American public.

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It's an interesting point because we know just from reading the blog comments and from

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from professors and students that a typical opinion of free market thought is that it's

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just in favor of, it's like an industry, like a producer's lobby in some way, you know,

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that we just, we favor the large corporations. So it seems like your article is a nice contrary

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view to that.

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Yes, sir. Look at that and say that large corporations or any corporations are not always

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Friendly to free market. Many times they want free markets for their trading, but not for

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other people in there.

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Very good. Can you tell us then just a little bit of something about yourself and your plans?

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I mean, this is a wonderful piece. It takes a completely different... It adds something

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new really, I think, to our understanding of the industry and yet you are just... You're

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a senior now?

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I'm a senior at Wofford College, graduating with both an economics degree and a computer science degree.

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And we'll be entering the work field for at least a little while.

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Right. That's like uber geek or something. Economist and computer.

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It's a strange mix to say the least.

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And what are you doing at the institute right now?

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Right now I'm still researching the oil industry and trying to find some more solid ties between

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Requesting of Regulations by both the oil industry and the environmentalist lobbyist.

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You finding good resources here to use?

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I found quite a good many. Any book that I would like to have on free market economics that's here.

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And what led you to your interest in the Austrian tradition of thought?

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I have to give credit to Dr. Terrell for that.

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He is very much pro-market and can ridicule any Keynesian argument and I took issue with the idea that inflation affects no one and is not harmful to an economy.

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It seemed counterintuitive and after thorough research on it, it was counterintuitive.

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So, when you took his economics class, you had no particular ideological sympathies?

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Not one that I had formed. I was very much pro-business and just didn't like the government

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coming in and taking away someone's rights and the idea of protecting a false liberty

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or protecting you against yourself. And that just lined up very well with the Austrian

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School.

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Yeah, that's great. I'm glad you gave Professor Terrell credit. He's one of many Austrian economists that are teaching every day in these wonderful schools like Wofford and many other liberal arts schools and state universities and having a great influence on the students that are passing through, so we're very pleased that you ended up in his classroom.

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By the way, how are you able to get away from school to be here with us for the month of January?

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Wofford has an interim program where we spend four weeks studying particularly any topic we choose

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and we come up with an independent idea to come study at the Mises Institute.

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That's just tremendous. It's our gain and we're very pleased to have had you here.

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I'm glad you took out a few minutes every day to talk to me about the subject.

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I enjoyed it. Thank you.