Why Pump Price Stabilization Makes Sense
Stabilizing fuel prices to pre-crisis level will give governments the windfall they need to bring relief to national economies until more normal conditions return
By Jacob Doyle
Rock-bottom oil prices are offering a windfall of savings that urgently needs to be translated into government revenue to help countries navigate through the COVID19 economic slowdown, says veteran financial analyst Michael Harris, founder of Cribstone Strategic Macro and a regular contributor on CNBC.
Click here to listen to the my interview with Mike
“There’s a huge windfall out there. Consumers aren’t spending it and if consumers aren’t going to spend it, it’s deflationary. Yes it helps consumer balance sheets but it doesn’t help the economy as a whole,” said Harris. “Whereas, if the Government takes the windfall it front runs a needed source of funding for all this stimulus that is helping the economy.”
A painless way to gain much-needed government revenue
By enacting a “pump-price stabilization measure,” the government could set the price of gasoline at the pump to “pre-COVID level,” Harris explained. The difference between that price and the current cost-determined price would be channeled to government coffers as urgently needed revenue at a time when government spending is rapidly rising due to COVID crisis relief expenses and tax income is dangerously low owing to the recessed global economy. The consumer should be indifferent as they will optically see pump prices that they are very comfortable with.
Earmarking a portion of this revenue to support domestic oil producers could protect that industry from collapsing and make the measure more “politically palatable,” he said. Otherwise, “governments are going to spend in this environment whatever they need to spend.”
“On balance this should just be viewed as a source of government revenue, because it is a tax on motor vehicle fuel, you could explicitly make it for infrastructure, roads and bridges and, you know, there would be a logical element but then it gets back to the whole perception of the gas tax.”
A halt on price deflation
With both consumer demand and oil prices low, there is a looming risk of broad price deflation, which could increase the existing drain on companies earnings and jobs.
“So one of the arguments for keeping the pump price stable would be to halt deflationary pressures on the economy,” he said.
Potential for broad bipartisan support
Pump price stabilization could draw bipartisan support, he reasoned. With government taking on an ever larger role to stabilize the economy in the face of the recessive impact of the pandemic, supporters of smaller government have largely been silenced. But the rising need for government revenue to at least partly offset the increased spending cannot be denied. As the drop in pump prices has been a sudden impact of slumping barrel prices, generating revenue by setting the pump price back to what it was in February will not feel to consumers like a punishing tax hike, especially at a time when they are driving so much less.
“This seems to be a very politically palatable way to help to address the need for revenue without raising taxes in a punishing way,” he said, “and it’s a measure that is competitively constructive for the economy and for business.”
The historical opponents to a federal gasoline tax in the US will have a powerful incentive to support the measure. As both industries say they are in need of government bailouts, “it feels like the balance of lobbying power should shift in the favour of logic at this stage.”
A self-correcting revenue tool
Harris admitted that complications could arise when demand for motor fuel returns to normal once the COVID crisis starts to ebb. The market price for oil would then rise, thereby reducing or eliminating the difference between the cost-based price of fuel at the pump and the stabilized price. By then, however, “the economy is working again so the need for stimulus will be less,” and “other components of tax and raising revenue will be more capable of materializing.”
If this measure is implemented, Harris emphasized, it is imperative for the government to spend the revenue the measure generates rather than use it for deficit reduction, in order to avert further economic downturn.
For those who oppose it
Asked what he would say to an opponent of pump price stabilization, who is happy with the currently low gasoline prices and wants them to stay that way, Harris responded:
“Well, look, the low pump prices right now are destroying a lot of industries, they are destroying American jobs and they are deflationary,” he said. “Unlike an import tax, which would clearly help American jobs directly but wouldn’t put any money in the Government’s pocket to help fund the stimulus, this measure promises to do both.”
Inoculates against future price shocks
Stabilizing the pump price now at February levels could have an added benefit once the economy begins to swing upward.
“The last thing you want is that as soon as things are starting to stabilize the consumer starts seeing this massive increase in the pump price,” he said. “So it is almost better to get this pump price stabilization mechanism in place now.”
Global appeal
Should this measure just be applied in the US, or in other countries, too?
“Every country should be doing this,” he said. “Effectively, this is not a US specific measure at all, this is a way to say ‘look we have an ex-Opec global windfall,’ governments everywhere are trying to fund this stimulus that they need to fund. This is price inelastic demand, which means if they raise the pump price to where it was before the crisis began it will have zero impact on oil demand, because people are avoiding buying oil now because of the price, people are not buying oil now because they are not using it, the one’s using it will keep using it.”