Last week, President Obama called for the repeal of a $4 billion tax incentive for domestic oil and gas production. His argument is that the oil and gas industry is doing quite well and does not need any help from the government.
In the long-term, the President is right. Oil and gas companies do not need these incentives in perpetuity.
That said, the President could not have chosen a worse time to repeal these incentives. In the short-term, repealing this tax incentive now, when gasoline prices are high, will only push gas prices even higher.
In essence, this action will exacerbate the very problem that the President appears to be using as a wedge issue for his reelection campaign.
Not only will gas prices rise, but they will disproportionately impact consumers.
In the short-term, gasoline has a low price elasticity of demand. This economic term is just a fancy way of say that people are insensitive to large changes in the price of gasoline. They are insensitive because they still need gasoline to get to work and take their children to school. They will reduce their travel at the margin, but the market price needs to rise to even higher levels before they do so.
Basic economics dictates that when a tax is levied on a good with a low price elasticity of demand, those demanding that good will bear more of the price impact than those who supply it.
This happens because adding a tax requires an oil firm to charge more money for each gallon of gasoline to offset most of the tax. Because consumers need to buy the gasoline, the company passes the majority of the tax onto the consumer through price increases.
Below is a graphic illustration of how this logic plays out both before and after the tax.
Either Obama does not understand basic economics or he does, but is conveniently ignoring it for political gain.