The Gas Tax Holiday

Hillary Clinton and John McCain support the proposed Gas Tax Holiday – which will suspend the federal tax on gas through the summer. The hope is that this will lower gas prices for consumers.

It probably won’t, and here’s why:

You’re right that competition generally drives prices down, but that only works to the extent more product can be produced.

Where supplies are fixed — and oil/gas supplies, for all intents and purposes, are — it is the demand that determines price. One oil company could cut its gas prices, but it can’t sell anymore gas than it already is (because it already sells all the gas it has), so purchasers would have no choice but to get the rest of their gas from someone else. This leaves oil companies with no incentive for lowering prices. If I’m already selling out all my inventory, and I can’t make any more, lower prices cannot boost sales or take sales from someone else. All they can do is cut my profits.

From Talking Points Memo

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