December 03, 2007

Two takes on $100/bbl oil

Friedman over at the NYT has a brill piece about how much a $1.00 increase in the gas tax would have helped the economy and started the long process of weening us off oil.

“Think about it,” says Phil Verleger, an energy economist. “We could have replaced the current payroll tax with a gasoline tax. Middle-class consumers would have seen increased take-home pay of between six and nine percent, even though they would have had to pay more at the pump. A stronger foundation for future economic growth would have been laid by keeping more oil revenue home, and we might not now be facing a recession.”

As a higher gas tax discouraged oil consumption, the Harvard University economist and former Bush adviser N. Gregory Mankiw has argued: “the price of oil would fall in world markets. As a result, the price of gas to [U.S.] consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.”

But U.S. consumers would have known that, with a higher gasoline tax locked in for good, pump prices would never be going back to the old days, adds Mr. Verleger, so they would have a much stronger incentive to switch to more fuel-efficient vehicles and Detroit would have had to make more hybrids to survive. This would have put Detroit five years ahead of where it is now. “It’s called the America wins program,” said Mr. Verleger, “instead of the petro-states win program.”

We simply cannot go on being as dumb as we wanna be. If you hate the war in Iraq, then you want a gasoline tax so you can argue that we can pull out of there without remaining dependent on an even more unstable region. If you want to see us negotiate with Iran, not bomb it, you want a gasoline tax that will give us some real leverage by helping to reduce the income of the ayatollahs.

This piece dovetailed nicely with this one in the WaPo regarding the geopolitics of $100/bbl oil. Not surprisingly, he thinks that part of this would be solved with higher energy taxes. Because from what we've seen in Europe and Japan, that's what you need to start people on a path to conservation.

At some point, higher prices will dampen demand; changes in the weather and business cycle could also lead to lower prices. Still, a major turning point has been reached. Until now, oil's main geopolitical threat lay in the concentration of reserves in the unstable Persian Gulf. Supply disruptions (1973, 1979-80, 1990) coincided with wars and revolutions. Otherwise, surplus capacity cushioned losses from accidents and weather. Now, most of that surplus has vanished. The pivotal year was 2004, when global demand, propelled by China, rose about triple the expected rate, says Larry Goldstein of the Energy Policy Research Foundation.

So the tightened gap between supply and demand has shifted power to producers. "Will competition for scarce resources lead to political or even military clashes among major powers?" asks a report by the National Petroleum Council. "Will bilateral arrangements among nations become common as governments attempt to 'secure' energy supplies outside of traditional market mechanisms?"

Here is what we might do: Raise fuel economy standards for new cars and trucks; gradually increase the gas tax (possibly offset with tax cuts) to induce people to buy those vehicles; expand oil and natural gas production in Alaska, the Gulf of Mexico, and off the Atlantic and Pacific coasts. These steps would, with time, temper the power of oil producers while also checking greenhouse gases. But many liberals, conservatives and environmentalists oppose parts of a sensible compromise. The stalemate hurts mainly us.

We have absolutely got to find a way out of this mess and we're not going to do it with new drilling and exploration, despite the idiotic opinion of a certain interior decorator who fancies herself knowledgeable about the oil and gas industry.

Posted by mcblogger at December 3, 2007 04:06 PM

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