Bernanke: Nothing can be done to affect gas prices

April 27, 2006

With talk of windfall profits taxes, rebate checks and gas tax holidays in the news, Federal Reserve Chairman Ben Bernanke warned members of Congress today that nearly all of their attempts at a short-run fix are likely to end up doing little to help consumers. From CNN Money:

In response to several questions about near record high prices for oil and gasoline, Bernanke said that the Fed was concerned about them but that higher oil prices were probably more of a threat for inflation than for causing an economic slowdown.

"One issue we'll be looking at carefully is whether oil price increases pass through into core inflation, whether they go beyond the energy sector. If that were to happen, that would be very deleterious to the economy," he said. "If inflation is not affected by high oil prices, that would give the Fed more leeway," he said.

Bernanke added that he did not see any reason for oil prices to head much lower any time soon. He said that a so-called windfall profit tax on oil companies, which has been discussed by some politicians, would probably not cause them to increase production.

"Unfortunately nothing can be done to effect [sic] oil or gasoline prices in the short term," Bernanke said, adding that the reason oil prices have risen so sharply is simply due to supply and demand issues. He stressed that conservation and initiatives to find alternative sources of energy were needed to put downward pressure on oil and gas prices over the long haul. (Full Story)

Specifically on the issue of a windfall profits tax, we have this testimony excerpt courtesy of the Wall Street Journal:

Rep. Kevin Brady (R., Texas) asked him, “We’ve seen a spate of ideas to deal with energy prices, from a windfall profit tax …to $100 rebates and gas tax holidays. Do these substantively, positively impact the fundamental drivers of our energy prices? Does the windfall profits tax increase production or in any way lower our gas prices any way?”

Bernanke replied: “I don’t think it would. Profits taxes have the adverse effect of removing one of the major incentives of our market system; if people think that their profits are going to be taxed away, that reduces their incentive to engage in certain activities. So I would like to let the market system work as much as possible to generate new supplies — both of oil but also of alternatives — and for the prices, painful as they may be, to help generate more conservation and alternative uses of energy on the demand side.”

For more on gasoline tax policy, visit our newly added section on the topic.

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