Will taxing Oil Companies really cause gas price to rise?

Question

Won't other factors apply to prevent or adjust the rise?

Answer 1

Short answer: it depends on how much of a price increase, and how rapidly.

Long answer:
This is an interesting question, and the answer is not that straight-forward because we're not dealing with a perfectly competitive industry as much as with a cartel or monopolistically-competitive industry.

The tax will have additional impacts upon production beyond that of perfect competition because of the strategic behavior intrinsic to this industry. This behavior has two large components:

1) Competing oil companies react to one another's price movements (ie, the wholesale prices tend to track one another and therefore be reflected in similar movements at the pump).
2) The oil industry as a whole tries to keep the price low enough to discourage innovation that would reduce demand for its product (since it reaps substantial benefits from economies of scale) but as high as possible to support profitability.

It is likely that, because retail gas (what you and I buy) is relatively inelastic (unresponsive to price) and thus wholesale gas (what the gas stations buy) is relatively inelastic, prices will rise at the pump by close the full amount of the tax because consumers will not change their consumption habits substantially in order to avoid the tax.

Now this depends upon how high of a tax hike it is. A measure such as elasticity (how much consumption decreases when the price increases) is only valid within a certain range of prices. If the price increase is substantive enough, elasticity will be larger. That is to say, a $0.30 per gallon federal retail tax won't likely cause a shift in consumption, while a $3.20 per gallon federal retail tax will lead to changes in consumer behavior.

Answer 2

They claim that they are supply constrained by refining capacity, which means the supply curve is nearly flat in the short term. Therefore the price must rise enough to restrict demand to the available supply if we are not to have gas lines. If this is indeed the situation a tax on oil companies, or even a tax on gas at the pump should have no effect on the price and it would all come out of company profits. However I have doubts about the truth of their claims, and they would probable reduce supply if they are taxed, which would therefore permit an increase in the price.

Answer 3

Well of course. Thats the funny thing about taxes. If you put a tax on me and all my competitors we can simply pass on the tax to the consumer. Because we are all being uniformly taxed so we all know as soon as the tax is passed how much our competitiors cost of business just went up.

The weak minded have yet to realize companies and corporations do not pay taxes people do.

Right now the Federal, State and Local taxes are on average $0.46 per gallon of gas. The profit collected by the refiners and oil companies is about $0.10 per gallon of gas. How do you tax an oil company without increasing the cost of their products.

And where is the real greed at the oil companies or "the greedy hand of government thrusting itself into every corner and crevice of industry, and grasping the spoil of the multitude. Invention is continually exercised, to furnish new pretenses for revenues and taxation. It watches prosperity as its prey and permits none to escape without tribute." Thomas Paine

Answer 4

Sneezing in their vicinity makes the price go up. I don't think anything will offset the rise in prices - the oil companies are just greedy, it's that simple. Each one posts Billions of dollars in profits (that's profits, after all expenses, payroll, etc are paid), yet we have people who can barely afford to get to work.