Better Living Through Stable Oil Prices
Goldman Sachs says that as world economic growth resumes, we’ll see $85 a barrel oil this year and possibly $100 a barrel oil in 2010. That, as I’ve worried before, would stand a good chance of just see-sawing us back into recession. Then the price of oil would plummet again, and once again investment in new oil production and oil alternatives alike would collapse. Could there be a better way? Brad Plumer thinks so:
Another idea—which I mumbled about in my TNRtv video yesterday, but which was originally floated by Jason Bordoff and Gilbert Metcalf here—would be for the United States to implement some sort of variable oil tax that would keep the domestic price of oil more or less stable: When world oil prices rise, the tax decreases; when oil prices plunge, the tax increases. That would help create a predictable price signal to encourage conservation and alternatives to oil, and raise revenue for energy projects (not to mention send fewer dollars overseas). It’s a slight twist on the gas tax idea, and sure seems preferable to the current course.
I think this is a good idea. I think it’s very confusing and unproductive for the US government to be, on the one hand, talking about how we need more fuel efficient cars and then on the other hand acting as if we have an implicit policy objective of making oil as cheap as possible. Meanwhile, we don’t have enough revenue to meet our transportation funding needs. Under the circumstances, it would be very useful to set an explicit medium-term price target, with the price controlled by a variable tax, and the revenue from the tax used to fund our transportation needs.
Back in the tragic real world of actual politics, however, apparently congressional Democrats are terrified of the mere prospect of Rep. Jim Oberstar (D-WI) so much as mentioning an increase in gas taxes. Since the public appears to have an extremely firm and totally wrongheaded opinion on this issue, one additional potential bonus of Plumer’s ideas is that the public also seems to have no concept whatsoever of how tax incidence works. Thus it’s possible that if you could reformulate the basic gas tax concept as not a tax on gasoline that consumers pay at the pump, but a tax on oil paid by evil oil companies, that you could get further with it politically even though the actual impact would not really be different.
33 Responses to “Better Living Through Stable Oil Prices”
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June 5th, 2009 at 1:51 pm
Then the price of oil would plummet again, and once again investment in new oil production and oil alternatives alike would collapse.
What makes you think that investment is going to restart?
June 5th, 2009 at 2:04 pm
Minnesota, Matt, not Wisconsin.
June 5th, 2009 at 2:04 pm
I don’t see how a variable gas tax is workable. All you’ll get is price stability; smart gas producers will just set their prices at whatever the target level is, so the extra revenues go to them.
Meanwhile everyone will get pissed that the gov is guaranteeing a high price level for the gas companies with no benefit to the consumer.
June 5th, 2009 at 2:04 pm
Goldman Sachs says:
“That with our bailout money we have gone long on oil and do wish to inform you that in our opinion, using government money to go long on oil rather than force innovation should lead to high oil prices”
We seem to forget that GS and Treasury are one in the same, and GS passes government reports around the company, and show them to Chinese bankers before we get to see them. It is the way we implement a bailout policy. GS is alos the official liquidity manager for the SEC, which means that often the largest block of trades are there precisely to make liquidity behave according to Treasury’s desire.
June 5th, 2009 at 2:06 pm
Last summer Goldman-Sachs predicted $200/barrel within a few months.
Goldman-Sachs was a co-founder of the International Commodities Exchange, which is totally unregulated, and promoted commodities index funds and then dumped billions of dollars into oil futures.
Current oil inventories are at record highs and demand is continuing to decrease. Goldman-Sachs is manipulating the price of oil. The fact that Obama just appointed an ex Goldman-Sachs guy to head the CFTC is not a good sign.
Conservation is much needed, but giving more money to financial “innovators” is not the right way to do it.
June 5th, 2009 at 2:07 pm
I don’t understand how this would work. If there was a targeted price what producer would sell for less than that?
June 5th, 2009 at 2:11 pm
There is a viable scenario, of course, where in the future oil doesn’t plummet just because the United States goes into recession.
The world has begun to make adjustments to life without the United States’ market. Why would other nation-states continue to trade heavily with the biggest debtor nation in the history of known universe? They are not suicidal, like we are.
Our survival depends on changing our auto fleet from combustion to electric, as soon as possible. Goldman Sachs isn’t the only outfit making predictions. I’ve seen some doozies, like $200/barrel by the summer of 2011, $250/barrel by early 2013, $180/barrel in mid August of this year.
A tax would great, but it is not gonna fly, and as a result, by 2015 or thereabouts America will be looking to nationalize corporations that are making the moochacha, like the Big Oil boys.
June 5th, 2009 at 2:14 pm
One could just go European with that and set the gas tax so high that most of the retail price is tax. Then movements in the price of oil won’t make the pump price change all that much on pct terms. In addition the revenue stream will be stable, and as govts always seem to assume that the a variable revenue stream will always come in on the high end, see California, this feature will keep the govt out of trouble.
I doubt a $6 a gallon gas tax could get passed though.
June 5th, 2009 at 2:14 pm
Maybe you could call it a windfall profits tax. Seems like somebody proposed that during the campaign.
June 5th, 2009 at 2:18 pm
Higher gas taxes would do all of the following:
Reduce fossil fuel consumption
Reduce balance of payments deficit
Increase govt. revenues to help reduce deficit
Reduce dependence on unstable foreign oil producers
Make more fuel efficient cars attractive to consumers
But nah, it’ll never fly. Tells you a lot about how phucked up this country really is.
June 5th, 2009 at 2:18 pm
We normally want taxes & spending to be counter-cyclical, so they stimulate the economy during times of recession and slow it during boom times. Isn’t that what currently happens with the price of oil? The scheme Brad and you are suggesting would be pro-cyclical, the exact opposite of what we normally want.
Mike, presumably you’d have to implement the tax at somewhat below the level needed to make the effective price flat, so that purchasers still had an incentive to buy the cheapest oil. e.g., for a target price of $100, make the tax be
so that effective price ranges from $90 to $100 as raw cost goes from $0 to $100.
June 5th, 2009 at 2:22 pm
Max424: We have the most total debt, but we’re both a reasonably rich and reasonably populous country, so that’s fairly misleading. When you look at debt-to-GDP or per capita GDP, there are quite a few countries (and not poverty stricken third world countries either, but prosperous countries like Norway) which owe more money than we do.
June 5th, 2009 at 2:23 pm
Err, I mean per capita debt, obviously.
June 5th, 2009 at 2:27 pm
There would be a danger of shortages. Obviously if there was too much of a shortage politicians would pay a price, but it seems likely to me that politicians would aim for a medium where it was hard to get gas, but it was cheaper and since people don’t understand how this stuff works they would think it was the bad oil companies who were responsible. IF you can ensure that this kind of politicization wouldn’t happen I would be all for it. Otherwise a fixed oil tax would be better.
June 5th, 2009 at 2:50 pm
I must be missing something, because this proposal doesn’t make sense to me at all.
In order to work, the tax would have to generate money when the optimal price of oil was less than, say, $100 and give the money back when the “true” price was higher. But under this law, why would an oil producer ever charge an American firm less than $100? Producers would no longer be able to increase demand by lowering prices, completely breaking the supply and demand curve. So you either end up with windfall profits for oil producers or shortages for consumers.
Of course, all of these problems are solvable. We’d just need to implement a windfall profit tax to recoup the lost tax dollars, legislate production quotas for oil producers to prevent them from responding to the profit tax by lowering production, and give every American weekly oil rations to prevent shortages. Obviously, we’d need restrictions on hording/reselling the rations/oil, too, otherwise creative financial engineers would find ways around the price restrictions. And it might get a little tricky to make sure everyone’s rations are set fairly, especially for corporations that depend on oil/petroleum products, but we can give that job to smart people like the Commerce Secretary or maybe the Federal Reserve.
So, upon further reflection, maybe that’s what Matt had in mind. And I guess I can see where he’s coming from, with a global economy this hard to manage, today’s workers need leaders who can take command and get things under control.
June 5th, 2009 at 2:53 pm
Last summer Goldman-Sachs predicted $200/barrel within a few months
Not only that, but a few months ago they were predicting $52/barrel oil at the end of this year. They make their money by being well-connected to the power elite (e.g., looting the public treasury so that their deadbeat counterparties can pay up), not by actually being good at predicting stuff.
The price swing damping via oil tax is an interesting idea. It would increase the *world* volatility of oil prices at the same time that it stabilized US domestic prices. Damping the price signal locally means that our consumption would not respond as elastically to price swings in the world market, and that would mean bigger price swings would be needed to accommodate changes in world supply. We would, in short, not be doing the world any favors (in fact I think one of the reasons for the volatility in world oil prices is the inelasticity of European demand, induced in part by high gas taxes). Also, if this tax were large enough to be a significant source of revenue for the US, it would suffer somewhat from being procyclical (like the state of CA’s income taxes, if that doesn’t seem like a problem at first glance).
It might still be a good idea, though. It’s a simple way to subsidize alternative energy in general without having the government try to do specific research to choose winners and losers.
June 5th, 2009 at 3:00 pm
You’re assuming (along with some other commenters) the reductio ad absurdum where we simply try to fix the price of oil. This is not what was proposed (nor were negative taxes in case of very high prices part of the proposal). But if it were, the problem of producers capturing the entire surplus is easily addressed by having the US Govt act as a middleman, buying oil on the world market and selling it to domestic consumers at the fixed price.
June 5th, 2009 at 3:11 pm
You’re assuming (along with some other commenters) the reductio ad absurdum where we simply try to fix the price of oil. This is not what was proposed (nor were negative taxes in case of very high prices part of the proposal).
I’m actually trying to figure out if Matt has even thought about what should happen if the market price goes higher than the target price. I mean, we asked him to think about it the last time he endorsed this idea, but I see no sign of an answer in Round Two.
June 5th, 2009 at 4:11 pm
Hmm, isn’t there already a name for such a tax? Now, what was it…? Oh, yeah! A CARBON TAX!
June 5th, 2009 at 4:31 pm
A carbon tax would (absent special modifications) be a fixed amount per barrel of oil, seeing as how a barrel of oil has a certain amount of carbon it in. It would be percentage-variable (much like gasoline taxes, which are some fixed amount per gallon, are today). But I believe in this proposal the actual amount of the tax (and not merely the percentage) is supposed to vary inversely with the price of oil, and a carbon tax would not achieve that.
June 5th, 2009 at 4:40 pm
Price stabilizing and pigovian taxes are not, necessarily, mutually exclusive. I’m in the middle of looking for sources to back this up. BRB.
June 5th, 2009 at 5:02 pm
Regarding carbon tax vs. price stabilization: this is what I’ve got so far. Not exactly what I had in mind, but the gist seems be that a carbon tax would would inherently stabilize prices; at least in comparison to cap+trade which would probably only increase price volatility. I’m still looking for proposals that explicitly combine (or balance) variations for emissions and rapid price changes. I guess I making more of an argument that cap+trade might be counter-productive to any price stabilizing efforts, while a carbon tax would make such policy considerations more feasible.
June 5th, 2009 at 6:20 pm
Goldman Sachs prediction is self-serving– they are one of the biggest speculatoes in oil futures around (JPMChase, Morgan Stanley and other big banks are following in their wake). If everyone goes into panic mode over oil prices– voila, prices will rise and the bank will be flush with cash.
But like all bubbles even this little one one will burst, and in fact it will burst fairly soon. Oil prices will be heading back down by summer’s end. Most impartial analyses I have seen predict that, absent major war or disaster, oil will not top 100$ again for at least another decade.
June 5th, 2009 at 6:25 pm
Kenneth Deffeyes reports that in less than 12 months (September to May), the number of active drilling rigs in operation has been cut from 2031 to 900. Some of that’s the crap price for oil and some of that is the fact that at this point Pique Oil is 4 years in the past.
June 5th, 2009 at 7:41 pm
Oberstar is from Minnesota. I know we’re hard to tell apart unless you squint hard, but we’re a little colder, more educated, and have a bigger central city. Also Minnesota is way better than Wisconsin.
June 5th, 2009 at 10:40 pm
“the public also seems to have no concept whatsoever of how tax incidence works”
Oh man, that’s brilliant. Apparently two wrong economic ideas make a right.
June 6th, 2009 at 12:06 am
MY is a Rube Goldberg communist. Why not just nationalize gas stations, then charge whateverthefuck we feel like? Does adding all these middle men make liberals feel better about central planning?
Note that I prefer my plan.
June 6th, 2009 at 1:08 am
I understand what you are saying Matt. There is a need to, somehow, restrain wild fluctuations in the price of oil. It is impossible to look at this graph without trepidation.
http://upload.wikimedia.org/wikipedia/commons/0/0f/Brent_Spot_monthly.svg
The oil price spike that began in mid ‘06 and peaked on July 11, 2008, when oil prices reached $147 per barrel, is spooky to look at. And no one -am I right?- no one really knows what caused it.
Obviously the danger is, what if there is another spike, a greater spike, and the starting point of the spike is much higher this time? And on the backside, the recession side, what if oil prices prove as immune to the law of supply and demand as they did when they were spiking?
A oil tax would raise revenue, for a time, which is good, and it would prepare the American consumer for price spike, which is good, but when oil prices surge past the tax line, what then?
An electric automobile fleet almost eliminates this problem, which you could say, is our most immediate and pressing concern as a nation because, continuing on with a combustion fleet ensures that at some point we encounter, not a Great Depression, but something much worse.
June 6th, 2009 at 3:11 am
I’m just a schlub with no platform, but I’ve been advocating exactly this for over a year. Put a floor of $4/gallon under regular gasoline (obviously, that’s “about” $4, because there is significant variation around the country).
Hey, I’ll cop to having loved the low prices this winter, but I know that they make alternatives less feasible.
Use the money something like this: give half of it back in the form of social security tax offsets so the working poor aren’t slammed, a quarter to transit OPERATING subsidies in order to give people an alternative way to get around, and a quarter to the long-term deficit.
P.S. Yes, I know money’s fungible, and Congress would play games with such a “deficit reduction” rule. But if it were in the legislation at least people could point and say, “You’re not doing what you said you would!”
June 6th, 2009 at 3:17 am
@DTM,
If the price of oil goes above the floor, the tax phases out. Simple as that. The purpose is not to raise revenue per se — although it would do that — but to put a floor under the price of gasoline so that people make the necessary investments in other modes of transportation.
Obviously it might have to rise over time to have the desired effect, but at a measured rate.
But then again, if it actually has the effect desired, the “market price” might be low enough that it just keep the retail price constant. I don’t think that will happen; Chinese and Indian demand will see to that. But it might.
June 6th, 2009 at 3:29 am
@Michael,
Wow! What a fascinating example of non sequiturs dressed up as Strawmen. Nobody said that when the price rises above the floor price that the tax would be refunded. It’s there to put a floor under the price, not fix it. Have you seen your opthalmologist lately?
And how exactly would ensuring that producers could not “increase demand by lowering the price” lead to EITHER “windfall profits for producers” (they lowered the price in your hypothetical, remember?) or “shortages for consumers” (they would have reduced their consumption because of the tax, or there’d be no need to pump up demand.) Emergency, emergency. Is there a logician in the house?
June 6th, 2009 at 3:40 am
@Scarpy,
The oil companies don’t “set” the price, and if consumption stayed where it was last winter the price would have as well. The tax actually can work, because any producer who demanded $100/barrel from American distributors when the clearing price is $70 would get to keep his or her oil. And when one has producing wells that’s not good.
They have to be kept flowing or the paraffins will congeal and then you have to do a workover. It’s not like drilling all over again, but believe me, you don’t want to do it if you don’t have to.
June 6th, 2009 at 6:57 am
Re: And no one -am I right?- no one really knows what caused it.
One word: speculation. Same as the housing bubble. now if you want to ask what made it possible for speculators to operate that would take a larger analysis.
Re: if consumption stayed where it was last winter the price would have as well.
Consumption has barely increased, and only to the extent that gasoline usage goes up every summer, as do gas prices.