Gasoline Prices: Here and There

Here, I took up Paul Krugman’s argument against the temporary relief that Senators Evil and Pointless—his words, not mine, sort of—are pretending to push. MK must be reading this blog, because she kindly sent me this report from the Center from American Progress Action Fund that sums up the discussions going on over there. The consensus of US economists appears to be that a temporary tax cut will not be reflected in a lower gas price and the money will go to the oil companies. (Senator Clinton proposes an excess profits tax on the oil companies to sop it up, which is where “pointless” comes in.) Makes sense, I guess. But wouldn’t economists love to see something like that happen, just to see if their theory works?

Well, Japan just did that all of last month, and the fact of the matter is, thing haven’t quite turned out that way. On and around April 1, service stations engaged in a session of price cutting that only game theorists could love, and come May, they are reportedly going through somewhat similar gyrations, ultimately bringing gas prices up to pre-April levels plus cost adjustments for rising oil prices. What gives?

Two possible reasons: First, I think that Japanese gas supply is more elastic than America’s. Japanese demand is growing more slowly, so there’s likely more production capacity available to take advantage of lower costs. The US oil market is a crazy-quilt of state regulations that makes it difficult in the short-run to adjust supply to cross-state shifts in demand, except for interstate drivers as well as drivers living near state borders. The segmentation also makes it difficult to increase supply through imports. These elements add up to a US market where supply is highly and uniquely inelastic.

Second, a shift in the supply curve can cause also cause changes in gas prices. Japanese oil businesses may be more amenable to public pressure and moral suasion. They cannot forget how the public vilified them for raising prices during the 1973 Oil Crisis, and politicians and the government piled on. All cost changes should be of equal effect, at least in the short-run, but in Japan, some costs are more equal than others.

Here, actually, I’d like to segue into my take on the fall showdown by way of the latest Asahi telephone poll. Hope to do that later, but in the meantime, briefly:

The LDP-New Komeito coalition must come up with a credible fiscal reform package that covers expenditures. The DPJ should come up with a credible fiscal reform package that ties together all the promises that they’ve been making with regard to cutting tax cuts and increasing subsidies. My vote in the next House of Representatives general election goes to the one that does. My bet is on None of the Above. Please stay tuned.