Demand and supply. Supply and demand. That fundamental analytic framework, simple and powerful as a tool with which to examine the sources of shifts in market prices, often is forgotten in the cacophony that characterizes Beltway efforts to score political points.

And increases in gasoline prices — visible every day to many millions of Americans — are a source of constant political gamesmanship despite the limited ability of government to affect them, except directly with taxes on gasoline itself, and indirectly with various regulatory constraints. Underlying demand conditions for gasoline are what they are, driven by individual preferences, the strength of the economy, conditions characterizing specific sectors that use fuels, and international price shifts. On the supply side of the market, the price of crude oil is determined, again, in national and international markets, and refining capacity cannot be changed much in the short and medium terms, except for unanticipated outages.

But such fundamental truths are no obstacle for misguided Beltway analysis. Consider for example the recent “report” from the minority members of the Senate Committee on Finance, led by Sen. Ron Wyden (D-OR), with the amusing title “Trump’s Tax Scam Hands Billions to Big Oil as Gas Prices for Working Families Soar.”

It goes downhill from there:

• The recent tax bill “is handing Big Oil a nearly $15 billion windfall” in addition to “nearly $5 billion” annually in existing tax subsidies, while “opening up new supertanker-sized loopholes.”
• “As Big Oil rakes in billions in new tax windfalls, prices at the pump are rising toward their highest level in more than three years.”
• The tax cuts are being funneled “into stock buyback schemes that boost [CEO] compensation, despite stunning gaps between CEO and employee pay.”

Where to begin? Consider first the utter sloppiness of the Wyden analysis, illustrated by the assertion that “Big Oil . . . already benefit[s] from nearly $5 billion each year” in tax preferences. That figure comes from a 2015 Congressional Budget Office (CBO) study (Table 1) of federal support for fuels and energy technologies. The problem: The $5 billion (actually $4.8 billion) are “tax preferences” (tax expenditures) for “fossil fuels,” not for “Big Oil,” that is, the large integrated oil companies. Indeed, the largest component of the CBO calculation — $1.7 billion for the percentage depletion allowance (a form of depreciation) — is not allowed for “Big Oil”; under the rules, it is an option only for small independent producers and royalty owners. Is it plausible that Sen. Wyden and the minority staff on the Senate Finance Committee do not know this? No, it is not.

A new tax law that cuts taxes has the effect of reducing tax liabilities. Who knew?

Moreover, those staffers surely are aware of the newest analysis of federal energy tax expenditures from the Energy Information Administration (Table 3), published only this April: In fiscal year 2016, “tax expenditures” for “natural gas and petroleum liquids” were negative $940 million. Tax expenditures for coal — $906 million — do not rescue the figures used in the Wyden report. Why did they opt for the older (and cruder) analysis?

The $15 billion (actually $14.7 billion) tax cut for “just four Big Oil companies” is an extrapolation for the next decade from those firms’ purported projections of the effects of the new tax law on their earnings ($1.47 billion) in 2018, an outcome that obviously includes the impacts of the tax bill on the market decisions of their customers, suppliers, etc. Put aside whether such an extrapolation is reasonable; the “$15 billion” over a decade is not comparable to the (incorrect) assertion of “$5 billion” in annual tax expenditures already in effect. More generally, the new tax law cuts the corporate tax rate from 35 percent to 21 percent, and changed the tax treatment of foreign earnings repatriated to the US so as to reduce sharply the large prior disincentive to move such foreign earnings back to the US. In the view of the Wyden report, these changes are equivalent to “opening up new supertanker-sized loopholes.” A less-sophisticated view is more straightforward: A new tax law that cuts taxes has the effect of reducing tax liabilities. Who knew?

Turning to the issue of gasoline prices, the Wyden report complains that the “Trump tax law brings massive tax windfalls for Big Oil, price hikes at the pump for working families.” Like Sherlock Holmes’ dog that failed to bark, the report never quite explains how the former yields the latter. One argument might be that the tax law will engender an increase in economic growth and with it an upward shift in demand conditions and prices for gasoline. Those future price increases would put upward pressure on current prices because gasoline can be stored (that is, because of the “intertemporal substitutability” of gasoline consumption). For obvious reasons, the report does not make that argument; nor does it note, again for obvious reasons, that the increased profitability of oil investments created by the tax reductions would increase that investment and over time put downward pressure on gasoline prices, other things equal. Nor is there a plausible argument to the effect that the tax law will reduce refining capacity.

The larger point is that in a demand/supply framework, it is difficult to transform the provisions of the tax law into a predicted increase in gasoline prices. And if “prices at the pump are rising toward their highest level in more than three years,” then the Wyden report leads us to ask what factors resulted in those higher prices in 2014; and what analytic rationale favors the tax bill over those or other conditions as an explanation for the more-recent price increases. Notice that average four-week US gasoline production was 9.93 million barrels per day (mmbd) on May 20, 2016; 10.02 mmbd on May 19, 2017; and 10.05 mmbd when the tax bill was signed on December 22, 2017. The Wyden report was released on May 22; gasoline production was 10.13 mmbd on May 18 and 10.23 mmbd a week later. Precisely how, Sen. Wyden, did the tax law lead to an increase in the price of gasoline?

In a demand/supply framework, it is difficult to transform the provisions of the tax law into a predicted increase in gasoline prices.

Sloppiness is one thing; demagoguery is another, and it is the latter into which the Wyden report descends in its complaint about stock buybacks (“schemes”) and CEO compensation. Whether Sen. Wyden realizes it or not, corporate executives have a fiduciary responsibility to maximize the value of the holdings of their shareholders, prominent among whom are pension funds, ordinary people saving for retirement, current retirees, and other such nonmembers of the gilded class. Sen. Wyden may believe, as did Vice President Al Gore during the 2000 election campaign, that insertion of the word “scheme” somehow settles the debate. It does not.

Corporate stock buybacks are a wholly legitimate financial tool with which firms can adjust their debt/equity ratios, respond to a perceived market undervaluation of their profitability, and engage in a number of other adjustments to market conditions. The Wyden argument boils down to an assertion that the firms buy back their own stock so as to drive up the price of the shares and thus yield an increase in CEO compensation, presumably in the form of stock options and the like. To describe this argument as infantile is vastly too kind: If the firm is paying too much for its stock, simply as an enrichment exercise for the executives, then the stock price will fall as this “scheme” transfers overall shareholder wealth to the subset of shareholders selling their stock at inflated prices. Does Sen. Wyden believe that investors as a group are stupid?

The complaint in the Wyden report about the ratio of CEO to median employee earnings is sleight of hand: “Among Fortune 500 oil companies that authorized stock buybacks in 2018, ratios of CEO pay to median employee pay in 2017 ranged from 100-to-1 . . . to 935-to-1.” (Italics added.) So: A tax bill that took effect in 2018 somehow is responsible for the CEO to median earnings ratio the previous year! Put aside the issue of how one is to determine the “appropriate” ratio; does the range of such ratios in 2017 differ from whatever it was during the Obama administration? The study referenced by the Wyden report states that “a long-running study by the AFL-CIO shows leaders of S&P 500 companies made about 347 times more than their average employees in 2016, up from 41-to-1 in 1983. A 2018 survey by Equilar Inc. found that CEOs earned 140 times more than their median workers.” Again, Sen. Wyden, please explain how the tax bill is relevant to this question.

This report is poorly executed political propaganda, unsubtle, uninformed, and useless. Whether Sen. Wyden should be penalized for it politically is a question for the voters of Oregon. Whether the minority staff of the Senate Finance Committee, having produced such drivel, should continue to receive salaries from American taxpayers is a question vastly more straightforward.