Is Obama really calling for an end to Fuel Subsidies, or just sucking up to voters?

Now, I hate subsidized agriculture and oil.  It creates inefficiency in the economy by allowing some to sell goods at prices below market value, a failure to pay the full marginal private cost for the good, resulting in higher demand for the good than the market would determine as an efficient equilibrium.  Subsidies also reduce competition and pays from the federal budget to do it.  In some cases it takes no more than ensuring a business keeps its edge on the market in return for political support.  Theoretically all free market enthusiasts should be against subsidies, but it is surprising how many there are in the U.S.  Anyway, as you can tell, I am not a fan.

So when I saw that President Obama called for an end to subsidies on oil earlier this week, I was quite ecstatic.  But I was also surprised.  A loss in subsidies will mean that the price of oil will increase, right?  Can Obama afford for the price of gas to go above $5 per gallon during an election year?  I would argue that he can’t.  If the national average goes above $5, I think he will have a much more difficult election than he should.  So, I guess the question is, why is he pushing for a cut in the subsidy? 

A number of reasons, first of which is the obvious value in the political rhetoric of appearing angry at massive and profitable MNCs and “standing with the American people” while having little chance that the subsidy will ever reach a vote.  Even if the subsidy never gets to a vote, which I sincerely doubt it will, Obama has had his moment in the sun at least appearing as though he doesn’t like subsidized oil.

However, I am hopeful that he might be heading in the right direction, with the goal of real action on the issue.  ExxonMobile, the largest energy corporation in the world, posted revenues of $121.6 billion dollars and profits of $9.4 billion last quarter, up from last year.  The simple fact is that these corporations can afford to be unsubsidized.  The petroleum and hydrocarbon markets are not infant industries, and need no protection.  Competition should be encouraged to the maximum.  With national security so vested in the oil market, it would seem that the greatest price stability and efficiency would be the best policy, so I say lets kill the subsidy.

A repeal of - or even a reduction in - the subsidy makes the price closer to the true cost of the oil (although it should be far higher since the marginal social costs of almost anything, but especially oil, are never factored into the price).  Some predictions show that the lost demand at a higher price would create greater losses to the companies than if they simply ate the lossed revenue difference of the subsidy.  Arguably, cutting the subsidy may not make the price of oil go up at all.  It will just mean that the corporations make less and the government pays them less out of the federal budget, possibly a win-win in my opinion.

So we will see…is it a political stunt or a realistic move in the right direction.  I give it till April 25^th, when gas switches to a more expensive type, one better suited for summer use, storage, and transport (don’t ask me about the technicalities of petroleum chemistry – I study political science).  As the price of gas goes up as summer gets closer, the more difficult it will become to make this all happen, so the sooner the better.  Unless of course you are a fan of subsidizing companies which already make billions.  In that case there is little reason for you to ever read this blog again.