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203 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0200 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. April 24, 2006 Advisory No. 203 RUNNING ON EMPTY - SENATE PROPOSALS FOR NEW OIL TAXES Energy prices are driven by supply and demand. This study uses basic economic concepts to show that recent movements in energy prices are explained by supply and demand forces rather than by any business conspiracy. This oil-tax proposals like those in the Senate tax reconciliation bill, or suggested in recent hearings, would affect the oil industry, its customers, and the broader U.S. economy. It concludes that Senate efforts to raise taxes on energy producers would, if enacted into law, restrict supply and further increase prices. Storms, Price Swings, and Hearings study also examines how In the second half of 2005, prices of oil and natural gas jumped sharply following hurricanes Katrina and Rita. The hurricanes caused massive damage in the Gulf Coast region, where a disproportionate share of the nation's oil and gas extraction and oil refining capacity are located. The Chairman of the Federal Trade Commission told Congress, At one point, over 95 percent of Gulf Coast crude oil production was inoperable, and numerous refineries and pipelines were either damaged or without electricity.'1 Not only was production of new crude and refined products interrupted, but power failures stranded some existing inventory that could not be pumped from storage nor pushed through pipelines. Many members of Congress understood that the hurricane-related supply disruption caused the price spike. Some members, though, claimed that the I Gasoline Prices price increase was rmulations) excessive and was engineered by large and small businesses in this country that included various producers, refiners, distributors, and gas station owners, who supposedly hoarded inventories or exercised market power. Both points of view 1/2/06 2/06 3/06 4/03 were represented at a Senate hearing last ons/wrgp/mogas history.html November 9, held jointly by the Senate Energy and Natural Resources Committee and the Senate Committee on Commerce, Science and Transportation. The timing of the price spike strongly supports the proposition that it was due to the supply disruption: oil prices shot up when output was lost and transport interrupted, but it quickly fell back to where it had been before the hurricanes sidelined production as production and distribution facilities returned to service. This is shown in Chart 1. (The subsequent price increase in the spring of 2006 is discussed below.) Natural gas prices also spiked g~*m 0 I gg~ g * Agg Chart 1 U.S. Retai (Regular, All Fo $3.20 $3.00 - $2.80 0 &$2.60___ 0 3 $2.40 z $2.20 F $2.00 8/01/05 9/05 10/03 11/07 12/05 Source: Energy Information Administration, at http://www.eia.doe.gov/oil gas/petroleum/data publicatio