Sometimes I wish the "laws" of demand and supply were real laws and economists had the authority to punish politicians who violate them. The ideal punishment would be increasing levels of "time out" (one hour, one day, one week, one month, one year, ...) during which the politician was not allowed to talk (Democrats see ...):
Linking two of the politically volatile issues of the moment, Senate Democrats say they will move forward this week with a plan that would eliminate tax breaks for big oil companies and divert the savings to offset the deficit.
With high gas prices and rising federal deficits in the political spotlight, senior Democrats believe that tying the two together will put pressure on Senate Republicans to support the measure or face a difficult time explaining their opposition to voters whose family budgets are being strained by fuel prices. ...
Increasing taxes on oil companies will not lower gas prices, so Democrats are hoping that voters see it as unfair that oil companies are making so much money and receiving tax breaks (economists don't have much to say about equity arguments -- there is no economic theory to explain differences in your "fairness" and my "fairness"). Oil companies are saying that they pay more in gas taxes than they recieve in profit per unit (an argument that has holes).
Many Republicans are certain to oppose the proposal, ... Republicans have characterized calls by Mr. Obama and Congressional Democrats to end the breaks as backdoor tax increases that will only increase gas prices.
Increasing taxes on oil companies may not raise gas prices significantly (see below).
“Instead of returning again and again to tax hikes that increase consumers’ costs, the administration and its Democrat allies in Congress should open their eyes to the vast energy resources we have right here at home and to the hundreds of thousands of jobs that opening them up could create,” Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement.
Hoping to reinforce that point, House Republicans are set to approve legislation this week that would expand the coastal areas where energy companies can explore and produce oil and gas.
Expanding domestic production of oil and gas will not reduce gas prices significantly (see "Drill, Baby, Drill").
The proposal would end a series of tax advantages for the five companies and produce about $21 billion over 10 years, Democrats say.
Let's do the math. Suppose the five major oil companies are able to take the entire $21 billion in higher taxes over 10 years and pass it along to consumers in the form of higher gas prices. U.S. consumption is about 132 billion gallons per year (source: EIA). Dividing $2.1 billion per year by 132 billion gallons gives a price increase of about $0.16 per gallon. A fairly typical driver (12k miles, 20 mpg) would pay about $96 more each year as a result. You can determine for yourself if this is a price increase that politicians should worry about (in terms of equity ... in terms of efficiency the price increase should be higher).
Note that the gallons per year number is less than the 2005 peak, due to a recession, which makes the dollar per gallon estimate about a penny higher. Also note that the amount of higher taxes passed along to consumers is a function of demand elasticity. Short run demand is inelastic, which means that most of the higher prices could be passed along to consumers. Over time, demand becomes more elastic and less and less of the tax could be passed along.
