Why Governments Should Not Subsidize Gas Prices

Recently, the call for fuel taxes to be suspended has surged, with this being a direct mandate from President Biden. This highlights a larger debate: should the government subsidize or get involved with gas prices? In this article, we will explore why government intervention in gas prices is unnecessary and counterproductive.

Why Subsidizing Gas Prices Is Unnecessary

The idea of subsidizing gas prices stems from a belief that the government should help mitigate costs, especially during periods of high inflation or economic downturns. However, this approach not only fails to address the root of the problem but also leads to inefficient and potentially harmful economic policies.

First, governments should focus on removing tariffs on imported gas and federal and state taxes rather than directly subsidizing prices. Tariffs impose unnecessary barriers on the market, leading to higher costs for consumers. Removing these barriers can help stabilize and make the market more competitive, lowering gas prices in the long term.

Free Market Dynamics vs. Government Price Control

Price control is a concept that is more commonly seen in communist countries, where prices are set by the government. In a free market economy, private companies determine prices based on supply and demand. Interfering with these natural market forces often leads to distortions and inefficiencies.

In a free market, gas prices are largely determined by the global supply and demand for oil. When there is a significant increase in demand, for example, gas prices will naturally rise. This is a natural mechanism to balance supply with demand. Government intervention can disrupt this natural balance, leading to unintended consequences.

The Petrochemical Industry’s Self-Moderating Mechanism

Since the early 1900s, the petrochemical industry has been self-moderating, meaning it adjusts its production and pricing to meet market demands. The only times there have been significant disruptions to this balance were when political interference occurred, such as during the conflicts over oil supplies or the oil crises in the 1970s.

Politicians who push for subsidies or price controls often do so to align with their environmental agendas, which can have adverse effects on the industry. For instance, former Secretary of State John Kerry and Representative Alexandria Ocasio-Castro (AOC) have called for drastic action to transition to green energy, often disregarding the immediate economic and technological challenges involved. Their rhetoric often focuses on the purported urgency and necessity of their agendas, but the reality is that these changes take time and cannot be rushed without severe economic repercussions.

Historical Examples and Lessons

Historically, whenever a government has provided subsidies, it has been difficult to withdraw them once the country can no longer afford them. For example, during the 2008 global financial crisis, many governments provided bailouts and subsidies, but these were challenging to phase out afterwards. This illustrates that subsidies are often politically popular in the short term but can lead to unsustainable long-term economic distortions.

Contrast this with the United States, where gasoline prices are much cheaper than in most developed market economies. This is due to a combination of factors, including less stringent fuel taxes and fewer regulations. The cheaper cost of gasoline is further emphasized by the fact that the United States has a robust and diverse economy, not solely dependent on oil.

Achieving Sustainable Innovation Through Competition

Instead of subsidizing gas prices, governments should focus on creating an environment that fosters innovation and alternative energy sources. Historically, competition has led to significant advancements in the energy sector, from the creation of the internal combustion engine to the development of renewable energy technologies.

By allowing the market to determine prices and supporting research and development efforts, governments can help the energy sector transition to more sustainable forms of energy without imposing undue burdens on the economy. Taxes on pollution, rather than gas prices, are a more effective way to encourage cleaner energy production and reduce environmental impacts.

In conclusion, subsidies for gas prices serve only as temporary Band-Aids rather than long-term solutions. The free market, when left to its natural course, can better handle fluctuations in gas prices through the forces of supply and demand. Governments should stay out of the business of micromanaging prices and instead focus on fostering a competitive and innovative energy market.