The always-on- the-lookout-for supply & demand examples duo at www.env-econ.com are shaking their heads at the continuing disconnect between how politicians talk about prices and how the price system actually works. Today’s contribution is gasoline prices.

Here’s a taste:

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”).

And this:

Expanding domestic production of oil and gas will not reduce gas prices significantly

“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…

Those back-of-the-envelope calculations can be so refreshing!