As a response to the increased oil process the President Biden proposed a gas tax holiday representing an 18-cent per gallon reduction until September and encouraged states to cut their gas taxes as well.
Reduction (or elimination) of taxes on fuel can potentially mitigate the burden of increased fuel prices on consumers in the short run. However, the price of oil largely depends on various aspects from (increased) demand and (limited) supply sides. Consequently, more strategic decisions need to be made to reduce the negative impacts of high oil prices in the long run.
Why do Oil Prices Matter?
Crude oil represents one of the most broadly used and the most traded goods in the world. The transportation sector represents one of the largest consumers of oil products. According to the Bureau of Transportation Statistics, in 2021 only 5.5 percent of the cars on the light vehicle market were hybrid and 3.2 percent were electric; the remaining 91.3 percent were fuel engine. Besides transportation, commercial and residential buildings, heavy industry and electric power generators have a significant share in total oil demand.
Because of the high dependency on petroleum products in many different sectors of the economy, fluctuations of oil prices can have a significant impact on human wellbeing. Increases in oil prices affect prices of other commodities and further contribute to higher inflation levels.
Main Drivers of Increased Oil Prices
The global oil prices have been highly fluctuating since 1970s and was mostly related to the formation and decisions made by the Organization of Petroleum Exporting Countries (OPEC). One of the earliest examples of OPEC trying to” manipulate” oil prices for political reasons was an embargo on Arab oil in 1973. The aim of the decision was to” punish” the United States through increased oil prices for supporting Israel during Israel-Arab War (Kliesen, 2001).
Ultimately, OPEC does not have an unlimited ability to influence global oil prices. According to the International Energy Agency, OPEC production represents only 40 percent of global crude oil production and other large oil producer countries such as the United States, Russia, Norway, and Mexico are not OPEC member countries. Accordingly, global oil prices heavily depend on global supply and demand fluctuations, as well as economic and political trends worldwide.
One of the most recent economic shocks on the oil market started in early 2020 when many economic activities were suspended due to the Covid pandemic related restrictions, which caused a dramatic decrease in demand on oil products. After the first waves of pandemic, along with lifting of restrictions, demand on oil gradually returned to the pre-pandemic levels due to the recovered demand from transportation and manufacturing sectors. However, the supply of oil cannot meet convalesced demand levels mostly due to reduced investments in oil extraction.
High pressure on oil prices due to the market deficit was magnified in 2022 after invasion of Ukraine by Russia. Oil prices are particularly sensitive to geopolitical events and rapid increase of oil prices is an immediate market response to armed conflicts. Even though Russian oil is still traded in most countries, the amount is significantly reduced. For example, the United States banned the import of Russian oil in early April. Moreover, the European Union (EU) will restrict Russian oil by the end of 2022 – oil that arrives by the sea will be totally banned, pipeline oil will be still traded but with limitations (i.e., Germany and Poland pledge to ban pipeline oil in their countries).
Towards Cleaner Energy Solutions?
Temporary elimination of federal gas taxes can reduce the burden of high gas prices on consumers in the short run. However, in the world of reduced investment in oil and tense geopolitical circumstances, it is critically important to reduce oil dependency in the long-run and move toward clean energy solutions.
The role of the government in shaping green energy economies is twofold: on one hand government policies and regulations should support further investments in greener technologies. This includes but is not limited to providing subsidies to clean energy producers, reduce tax burdens for green energy producers (and/or consumers), relieve bureaucratic burden and enhance investments in research and development to further improve the efficiency and profitability of green energy sources (IRENA, 2018). On the other hand, the government should create incentives to reduce demand for oil products by making alternative products more affordable and accessible. Considering that the transportation sector represents one of the largest consumers of oil products the first step should be to reduce demand from this sector. This action includes not only supporting production of hybrid and electric cars (and making them more affordable) but also incentivizing the usage of alternative methods of transportation, which implies making public transport more adopted to citizens’ needs (I.e., increase coverage area, reduce commute timing, increase reliability of public transport, etc.).
Shaping cleaner energy policies requires a complex approach and high investments in the sector, however this is the most efficient way to support reduction of oil dependency in the long run.
Ashraf, M. (2022). The War in Ukraine: A moment of Reckoning for the Oil and Gas Industry. Dublin: Accenture.
IRENA. (2018). Renewable Energy Policies in a Time of Transition. International Renewable Energy Agency.
Kliesen, K. (2001). Rising Oil Prices and Economic Turmoil: Must They Always Go Hand in Hand? St. Luis: Federal Reserve Bank of Sant Luis.