You can reduce the price of a good or service in two ways:
- Reduce demand
- Increase supply
Now, from the perspective of the United States, while we have one of the largest oil reserves, most of those reserves are shale. Shale oil is expensive to refine and particularly dirty compared to other sources of oil. If the price of oil drops far enough, America’s shale oil will no longer be profitable, and we will again force the owners of shale wells into bankruptcy. Setting up wells is expensive, and they must stay running for a while to recoup their cost. For this reason, it takes time to move wells successfully online and offline. It takes time to build, and it takes time to stop drilling. For this reason, America cannot drill baby drill our way to $1 per gallon of gasoline.
If you decide to give people cash to offset the increased cost of gasoline, demand will increase, pushing the price up. While government subsidies are helpful when there are long-term benefits from a good or service, such as education or health care, and a single player in an insurance market can reduce prices substantially, like with prescription drugs, the oil market is not one of those monopolistic markets. I am not opposed to all government regulation or even taking over entire sectors in the case of natural monopolies, but the oil market is not one of those sectors. It is not a natural monopoly, and it is not an insurance situation. The government should stay out of it. Sorry, Governor Newsom, gas cards are a bad policy.
It also is a strange situation where the government taxes and subsidizes a good. Pick a lane!
Suppose the US government decides to subsidize oil prices to a lower level while still having a gas tax (which is a bizarre combination of policies), that will either take tax revenue to subsidize a private good or print money to boost demand for a particular good, increasing the price overall. There is a point where printing money will cause inflation. It’s hard to know exactly where that will be; we don’t want to mess around with it. Printing money makes sense to pull ourselves out of recession, which is usually paired with deflation, but we don’t want to overheat the economy when GDP growth is up.
We need policies that raise people out of poverty, such as debt-free college, food stamps, and guaranteed health care. Subsidizing gasoline is not the way to do it.
The US cannot subsidize its way out of high oil prices.
Reducing demand can be done in several ways:
- Tax gasoline. Some of the tax will be paid by the producer, some by the consumer. You get a double dividend as well. You also don’t have to deal with the substitution effect.
- Upzone areas to increase tax revenue and lower the cost of housing. This makes transit more profitable to run.
- Implement mixed-use zoning so people don’t have to drive everywhere.
- Expanding transit, which is convenient and fast, will, through the substitution effect, pull people away from cars, reducing demand for gasoline. Transit needs to be built as a network, and larger cities should not operate out of a central hub. There are several ways to do this:
- Reduce restrictive regulations (not regarding safety, however) to lower the cost of building transit so we can have more transit and less driving via the substitution effect.
- Eliminate tariffs on foreign-built transit vehicles so transit agencies have lower costs and can expand.
- Designate main arterials as transit only to make transit run faster. This one is free!
Simply making driving more expensive without upzoning, expanding transit, and mixed-use zoning will be a revenue source for the government. People need alternatives and have access to amenities near their houses. When you do both at the same time, you have a sustainable situation.
We can now implement many policies to reduce the cost of building transit and the need to drive, reducing financial strain on American families.
Zoning reforms are almost free to implement, reduce the need to drive, and increase city tax revenue per square kilometer, which can be used to expand transit.