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Gas prices and the Conservative tax on everything

Fri 13 May 2011 by mskala Tags used: , ,

I've been hearing a lot of grumbling about gasoline prices recently. People who ought to know better on my social-networking friends lists circulated that asinine one-day "boycott" message a little while back. My alarm clock wakes me with CBC Radio every morning, and today they were talking to someone from Consumer's Union who was hoping to pressure the Federal government to Do Something. I'm of the opinion that the Federal government has already Done way too Much in this matter, and they ought to butt out already.

One of Harper's talking points in the recent election was to accuse the Liberals of pressing for a "tax on everything" (a scary renaming of the carbon tax that anybody who cares about survival of the planet, including a clear majority of Canadians, actually supports). But when you fill up your car's gas tank and pay today's prices for it, you are paying the Conservative tax on everything, which they implemented without a vote and which never received proper discussion or coverage. Let's put the blame where it belongs.

Disclosure: I don't own a car, and I do own units of a real-return bond index fund, which makes more profit in nominal terms when the price of everything (including gasoline) goes up. I don't think that really means I benefit from higher prices, only that I lose less than some other people. I've written about inflation-indexed bonds before. I'd rather have prices stay low and my bonds not make so many dollars.

The Conservatives have been keeping interest rates low. Most of us don't really think through what low interest rates mean, and that lack of thought benefits the politicians because they've been able to sell us on the idea that low interest rates are good. We see interest rate fluctuations on our credit cards and mortgages and we think we want to pay less interest, never mind that the low government-set rates are not really being reflected much in the consumer rates we pay. Banks and foreign bond purchasers pay low rates for money at the bank rates, re-lend it to us or abroad at the much higher consumer rates, pocket the difference, and tell us we benefit.

Here's what it has to do with gas prices: low interest rates make it more appealing to borrow money (if, and only if, you have access to the low rates). The government sets the interest rates by making available government bonds and setting the prices at which they'll sell (bond prices are the inverse of interest rates, so low rates means selling the bonds at high prices). The idea is that other bonds will also sell for prices related to the price of government bonds; so if the government promises to only pay a low rate for its debt, that means all other debtors will also be able to borrow money cheaply - if and only if they are able to participate in that same market. In practice, being able to participate in the bond market means being a corporation.

So with corporations able to borrow money cheaply, the idea is that they will. Then they have more dollars which they will spend, more dollars which we hope will somehow end up in the pockets of ordinary Canadians, and we supposedly have more dollars which we can spend to buy gasoline.

But more dollars to buy gasoline does not mean more gasoline actually exists! It also doesn't mean we have any less reason to want gasoline, nor that the corporations (which buy gasoline and other oil products too) will have less reason to want gasoline. On the contrary, people and corporations with more dollars to spend generally feel entitled to more gasoline than before. So what happens when the same number of people, with more dollars in their pockets, all set out to buy bigger shares of the same supply of gasoline? They're going to pay more of those dollars per litre and still not get any more. That's all that causes gasoline price increases: supply and demand.

It doesn't just have to be gasoline; in theory this ought to apply to everything. It's more true of gasoline, though, because of the limited supply. More dollars in circulation is supposed to "stimulate" the economy so that supply will increase; if you are buying something for which the supply can increase, then supply is supposed to increase instead of prices increasing and we're all supposed to win. Gas is different because its supply is fixed; there's not much meaningful way to "stimulate" it to exist in larger quantities. It's also not clear to what extent this theory of "stimulation" is actually true at all; economists have been arguing about it for generations and now both sides are treating it more as a question of religion than of science.

But it seems to be clear that in general, prices go up when interest rates are low. Note how careful I was just above to say we have "more dollars," not "more money." If I said we had more money because of low interest rates, it would be very easy to read that as saying we have more value, when the real point is that we don't have more value at all. Dollars only have value because of what they will buy. If there are more dollars but not more things to buy, then the value of dollars goes down. Low interest rates, by introducing more dollars into the system, reduce the value of dollars.

Anybody who has dollars of their own loses; corporations who are borrowing dollars win. These low Conservative interest rates are a sneaky tax: they are taking away value from Canadians who have savings, in order to prop up corporations that have debts. What about the many Canadians who have mortgages and other debts? They lose less because of the decreasing value of dollars, but they don't actually win because these low rates are only available to banks who don't pass them on to customers. Sorry, it's your fault. You should have been born a corporation if you wanted love from the current Government.

Low interest rates are, exactly, a Tax On Everything. And unlike the carbon tax most of us want, low interest rates don't benefit the environment; the only well-defined group they benefit is corporations.

I'm not convinced that low gas prices are really such a desirable goal, but if we really want those, there are only three ways to make them happen. One, we could make dollars more valuable. That means having fewer dollars in circulation (or at least, a slower growth of the number of dollars in circulation), and the only practical way to achieve it would be to increase interest rates. I don't see it happening under a Conservative government. As well as the reasons above, a stronger Canadian dollar would be bad for the USA and Harper can't be having that. Besides, even if the Conservatives did it, they would surely find a way to allow their corporate buddies to reap most of the benefit, so in real terms this approach would just translate to "make Canadians poorer." We really screwed ourselves in the election.

Two, increase supply. Wave the magic wand and cause more oil to exist than currently does. I don't see that happening. Even the most ridiculous of the "abiogenic oil" hypotheses (none of which have any genuine scientific support) don't predict that oil will start becoming available to us on the surface of the Earth faster than we're consuming it, any time soon; at best they say that some day tens of thousands of years from now (long after everyone currently alive is dead and the carbon dioxide has rendered extinct humanity and most other animal life) more oil will bubble up from Magical Oil Land deep inside the Earth, to the reservoirs we are currently emptying. But even if we had a direct pipe to Magical Oil Land today, the consequences of burning a lot more oil would help us kill ourselves even faster than we are already doing.

Three, decrease demand. There are in turn two ways to do that. One is by somehow making gas prices high compared to other things instead of just increasing them with everything else. This could actually happen by decreasing the prices of other things instead of by increasing gasoline. Then anyone with a choice (like large corporations, who can afford to sink money into the fixed costs of switching) will reduce their consumption of gasoline, and the price will decrease (fewer dollars chasing the same amount of gasoline) for those who cannot switch away. Fortunately, some of the economic forces I just described are having this effect to some extent, but it's too little, too late, and people who ought to know better are trying to pressure the government to counteract it. A carbon tax would help, and most of us want that, but that's not going to happen under a Conservative government. Instead we get to hear lies about how taxing carbon would be "a tax on everything," and we have to pay the Conservative inflation that actually is a tax on everything, for the benefit of corporate debt instead of the environment.

The other way to decrease demand for gasoline would be to actually stop using our cars, but that doesn't mean just for a day. I don't believe Canadians will really do it; we would rather whine, make meaningless protests, and put the blame anywhere except on the Conservative Government who are making this mess worse for all of us by keeping interest rates low.

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The rising gas prices don't have to do with supply and demand. Both supply and demand are remaining fairly constant. People who need to drive will drive the exact same amount no matter what the price, they'll just grumble more. The rise in prices is due to speculation on the commodity markets. http://www.foreignpolicy.com/articles/2011/04/27/how_goldman_sachs_created_the_food_crisis is a good primer on how that happened with food prices.
Bo - 2011-05-13 09:45
I think you've missed the point, Bo. People buying gasoline at the pumps are not trading gas for gas; they are trading dollars for gas. The supply of dollars is increasing, and the supply of gas isn't. That means it takes more dollars to buy the same amount of gas. Market manipulators benefit both from the general mess and from specific favours granted them by the government, but they certainly aren't the root cause.
Matt - 2011-05-13 10:15
(let me retype this. apparently using the percentage character isn't allowed)

Well, sure, more dollars means bigger prices. But according to StatCan the M2 has risen by some 6.2 percent. The gas prices are up some 50 percent. I don't think the money supply is rising at that rate. There are clearly other factors affecting the gas prices and I think speculation is dominating influence.
Bo - 2011-05-13 10:36
I agree that there are multiple causes. I don't believe that "speculation" is a bigger one than low interest rates.
Matt - 2011-05-13 11:21

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