The Oil Problem
As you may recall, right before the world economy collapsed oil was becoming incredibly expensive. Now, courtesy of global economic collapse, it’s cheap again. But it’s not actually all that cheap in historical terms. And it’s showing a notable tendency to leap upwards at the slightest sign of recovery. This suggests that any recovery might entail immediate large increases in gasoline prices and so forth in a way that could, in turn, cripple the recovery. As Ryan Avent says:
As the global economy recovers, so too will oil prices, and fast. That increase is going to cut the legs out from under a recovery; a rise in oil prices is like a tax increase, which is contractionary. And if we nonetheless manage to grow through the rise, the increase in prices and oil demand will expand the trade deficit once more.
I don’t think it’s that hard to work around these issues. We could pass a substantial gas tax increase now to take effect in two or three years. In expectation of the increase, consumers would purchase more fuel efficient automobiles, potentially boosting auto sales and reducing vulnerability to high oil prices. And I’m sure I don’t even need to say that a program of rapid expansion of transit and passenger and freight rail capacity, funded immediately by deficit spending and after recovery by gas and congestion taxes, would kill multiple birds with one stone — providing stimulus, facilitating structural shifts, and reducing exposure to rising oil prices.
This is exactly right. I find it very disappointing that there doesn’t seem to be legislative work on this happening. It’s clear today that economic conditions are worse than they were in February when the first stimulus package was being outlined, and the headline number on that package was too small given even the macroeconomic projections we had back then. What’s more, there’s near-universal agreement that even if optimists are right and growth returns in Q3 or Q4 of 2009 that it would still take years to re-achieve full employment. Under the circumstances, I think there’s a strong case for investment in rail infrastructure (both freight, intercity passenger, and commuter) projects beyond the merely “shovel ready.”
Beyond that, there remains a very strong case for a federal role in funding mass transit operating costs. All across America, transit systems are hiking fares and cutting back on service. That’s directly contractionary. It’s taking a lot of money out of the pockets of people with high marginal propensities to consume, and it’s also create a perverse situation where we’re laying-off or furloughing bus drivers with one hand, even as we’re trying to employ people in new transit starts. Meanwhile, once the service is cut back, there will be difficulty ramping it back up to speed when growth returns. Which means a lot of people could end up caught in the oil price hike trap. We ought to be doing the reverse. Cutting fares and expanding service. That would work as short-term stimulus, and it would also create a situation where we’re better-prepared for the next oil price spike.
26 Responses to “The Oil Problem”
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April 10th, 2009 at 1:29 pm
I’m too lazy to check the link, but if memory serves, isn’t this article advocating for a gas tax instead of cap-and-trade? Isn’t that a simpler, more elegant way to effect a lot of what we’re trying to do with cap-and-trade. Discuss.
April 10th, 2009 at 1:37 pm
Last year there was a push in congress to force the CFTC to actually regulate the oil futures markets. Senator Dorgan was a prime sponsor.
AFAIK, the bill never passed, due to lobbying from Goldman-Sachs and other manipulators of the market.
Reducing manipulation of oil futures would likely reduce the price of oil today and in the future.
April 10th, 2009 at 1:49 pm
Yes! If a law is passed today raising gas taxes two to three years from now I will drop everything and, in anticipation of those taxes, forgo my current financial obligations that I am already struggling with so that I can buy another fucking car. But a more fuel efficient fucking car than the otherwise perfectly fine one I have now. Brilliant!
The transit ideas are good. But the way the gas tax premise was put so casually just seemed terribly flawed.
April 10th, 2009 at 1:49 pm
Cutting fares and expanding service. That would work as short-term stimulus, and it would also create a situation where we’re better-prepared for the next oil price spike.
The hard part here is that this is requires federal/local coordination (something we don’t seem very good at lately). At the local level, with contracting budgets, this isn’t an option.
April 10th, 2009 at 2:05 pm
Observing the slow-as-molasses-in-January dawning of the concept that the age of exponential economic growth is coming to an end can be frustrating, but I guess you need to walk before you can run, so good work. Maybe in another 5-10 years we can start thinking about what to do about it beyond tinkering at the margins.
April 10th, 2009 at 2:09 pm
Under the circumstances, I think there’s a strong case for investment in rail infrastructure (both freight, intercity passenger, and commuter) projects beyond the merely “shovel ready.”
You think wrong, then. There isn’t a strong case for that.
Beyond that, there remains a very strong case for a federal role in funding mass transit operating costs. All across America, transit systems are hiking fares and cutting back on service. That’s directly contractionary. It’s taking a lot of money out of the pockets of people with high marginal propensities to consume, and it’s also create a perverse situation where we’re laying-off or furloughing bus drivers with one hand, even as we’re trying to employ people in new transit starts. Meanwhile, once the service is cut back, there will be difficulty ramping it back up to speed when growth returns.
Transit subsidies already distort the urban transportation market, and higher subsidies would only increase that distortion. Transit users should pay a much larger share of the costs of providing the transit services they consume. If they are not willing to do so, then transit services should be cut further.
April 10th, 2009 at 2:12 pm
Yep. Though there is a point to setting a future date for the beginning of higher gas tax rates, it has nothing to do with selling cars now. The benefit lies in the puchase decisions people make between the announcement and commencement of the tax.
April 10th, 2009 at 2:12 pm
I’m with bubba: A gas tax increase in three years will have minimal impact on peoples behavior today both for the reason bubba gives and because there’s a decent chance it’ll be repealed before or shortly after it goes into effect. In addition there’s the fact that the overwhelming majority of people simply don’t reason that way about budget decisions. The kind of people who do look at details of the tax code three years down the line when planning their purchases are likely to have financial planners and tax accountants taking care of these things for them. IOW the same people who really can simply garage the Bentley and step down to a mere Lexus.
April 10th, 2009 at 2:13 pm
DTM Says:
April 10th, 2009 at 1:25 pm
Aren’t we do for a new transportation bill this year? If so, I assume that would be the place we address this.
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You’re right, we are do for one. Plus Sec. LaHood hasn’t announced how he proposes to allocate the Stimulus money approved for DOT.
It’s agonozing waiting for this, as you know that will have the planning money for the Disneyland – Vegas high speed rail will be in it
April 10th, 2009 at 2:20 pm
Presented with the real potential that price signals – all by themselves – will force changes without government “help”, Matt is panicking and hoping that government can do something now, so that it will look like it led the way.
April 10th, 2009 at 2:45 pm
We ought to be doing the reverse. Cutting fares and expanding service. That would work as short-term stimulus, and it would also create a situation where we’re better-prepared for the next oil price spike.
Well, we can always dream. And in other news my city’s transit authority is fixing to reduce annual ridership by 50 million:
http://www.boston.com/news/local/breaking_news/2009/04/details_of_dras.html
April 10th, 2009 at 3:36 pm
I clicked, Jasper. Sounds bad, but there’s one thing I don’t understand: how does eliminating T stops save money?
April 10th, 2009 at 4:50 pm
By reducing the number of T vehicles you need to run.
April 10th, 2009 at 6:33 pm
Right now Obama is focusing on saving the banks and stimulating the economy, hopefully with unemployment extensions and aid to education and health care that do two kinds of lifting.
But the second string to our bow should be a national program to build mass transit, low income housing, single-payer health care, and clinics and schools. This would be the kind of direct investment in our own future that will pay dividends.
And the banks and financial industry should be given notice that we will do it without them if we need to. Let them watch several hundred billion flow into construction projects without their participation and they will have a new interest in cleaning up their financial house so they can qualify as responsible lenders.
Charles and the other trolls can relax- they’ve done their work well. Our agencies and legislators have little idea how to actually govern themselves or us, and the chances they could start building transit systems are about the same as expecting your baby to start discussing string theory.
And that’s the real reason we’ll pay through the nose to be Arabian vassals for some years to come- good old American know-how needed regular spark-plugging from guys with names like Volta, Van dePoele, and Diesel. We used to be a Buick but now we ain’t nothin’ but an old T-model Ford.
April 10th, 2009 at 7:31 pm
Nobody gives a dead dog’s cock what you think, “charles”.
April 10th, 2009 at 7:33 pm
You’re not fooling anyone, ‘Mixnerspotter’.
April 10th, 2009 at 7:37 pm
The best thing to do is nothing. It’s like standing in front of a bus (public transit). Why worry, it hasn’t hit you yet, has it?
But seriously, higher gas prices won’t necessarily do anything but re-arrange the economy. They won’t “cut the legs out from under a recovery”. They may hinder, they may help. In fact could be reasonably argued that not wasting our money on buying gas would lead to an even faster expanding economy.
April 10th, 2009 at 8:13 pm
These is something very disturbing about Americ’s inability to pass even a modest gas tax increase, all this time after September 11, 2001. An increase of just 25 cents would have a real (if admittedly small) effect on driving habits and traffic congestion. I’d like to see a large increase, say raising the gax tax to $1.00 or more (from the current 18.4 cents), but a small increase is better than nothing. If America can’t even take such a small step in the right direction, we may be in more trouble than we think.
April 10th, 2009 at 9:28 pm
It is crucial to understand that the oil bubble to $147 was entirely a speculative phenomena which was itself part of the monetary/credit system which has brought us to this point.
The commodity bubble of 08 was incredibly destructive. I fully expect another one in oil possibly this year. The trillions of dollars unleashed by world treasuries and central banks into the financial sphere has ignited the stock market, for now. Stock are going to have a difficult time advancing however in the face of what are sure to be horrendous earnings for so many companies. Yes there will be surprises on the upside but many many disappointments.
It is possible in theory that stocks will continue to attract most of the speculative money now flowing again. However just as likely is another run in oil. Then as time goes on in other commodities as desperate speculators try to make quick killings in the face of what amounts to existential uncertainty.
Little if any of the trillions being unleashed by governments is going to find its way into the real economy. The world has an overcapacity of every manufactured product you can think of. No sense investing there. No, the urge to inflate assets, financial or commodiies is stronger than ever.
This is the real reason why the bailout strategy is doomed to fail. The money is going to primarily go into speculation which will be destructive.
April 11th, 2009 at 3:30 am
“I don’t think it’s that hard to work around these issues. We could pass a substantial gas tax increase now to take effect in two or three years.”
Ryan’s worried that higher energy costs might derail an economic recovery, so his solution is to raise taxes on energy? That doesn’t make much sense.
Liberals really need to decide what their primary goal is. Is it to curtail carbon emissions without expanding the only viable, large-scale, non-carbon source of energy (nuclear)? Or is the goal to have a strong, growing economy that will generate the tax revenues to pay for the social programs you want? These two goals are opposed to each other. If you want reduced carbon emissions and no expansion of nuclear power, an L-shaped recession is perfect for you: factories are idled, fewer cars are sold, people drive less, etc. If you want a strong economy, then you need to ensure a plentiful supply of affordable energy. Instead, liberals oppose the use of one of America’s cheapest and most plentiful sources of energy (coal), oppose the expansion of nuclear power, etc.
April 11th, 2009 at 8:37 am
…a strong, growing economy that will generate the tax revenues to pay for the social programs you want…
I know republicans take a blood oath to ignore this fact, but the laffer curve is a joke until tax rates are *much* higher than they are now, don’t ya know.
April 11th, 2009 at 9:29 am
Increases in fleet fuel efficiency are best done through CAFE or other regulatory programs. After all we have SEER energy efficiency standards for refrigerators, air conditioners, furnaces and even water standards for flush toilets. Regulations are the best way to increase efficiency.
Why do we regulate electric efficiency but not autos? Because BIgAuto is a near monopoly that fights the standards instead of embracing them BigAuto business plan makes money off gas guzzlers but loses money on fuel efficient cars. Energy companies make more money with standards in place because they are “regulated” monopolies. The appliance manufacturers are more fragmented and have incentives to produce more fuel efficient appliances (consumer tax credits, etc).