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12/10/2007

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ChinaCoalWatcher

An excellent post but I must disagree with the notion that "stiff taxes" on oil imports would significantly impact US petroleum consumption. Of course, it all depends on how "stiff" one is talking about, but it is well known that fuel consumption is highly inelastic to price as compared to other goods. Since there is no good substitute for energy, an increase in taxes would only cause most people to forgo their alternative consumption and reduce their overall welfare through a negative income effect.

As an example, The EIA reports that nine years ago retail gasoline sold for 94 cents a gallon. Today the average price is $3.07, an increase in price in real terms of 165% or an average real annual rate of increase of 6%. Nevertheless per-capita gasoline consumption is practically identical: (9244/303)/(8310/272) = 1. Nine years, is also plenty of time for people to adjust their lifestyles (move, buy different cars, etc...) if you suspect a lagged response.

So here you have an indication of what the equivalent of "stiff taxes" might do to consumption - not much. All that seems to have happened in the past decade is a redistribution of surplus from consumers to producers - and hence sovereign funds.

Of course, you could increase the "stiffness" of the tax to raise the price so much as to reach the elastic domain. I suspect the tax level that might reduce consumption by a fifth would have to increase prices to more than double what we see today, say, between 6 and 10 dollars a gallon. I do not imagine that our politicians could sustain such an undoubtedly unpopular tax for long.

truxrule5

ChinaCoalWatcher: Posner did not say that US oil consumption would not decrease. In that paragraph he referred to identical CO2 emissions emitted OVERALL because stiff taxes levied in the US would only decrease consumption within the US. Reading in-between the lines: other countries that are not concerned with lower CO2 would not levy stiff taxes so as to not harm their own economies. China, India, Romania etc. will use any oil that we do not. And it might even mean cheaper oil for them because US demand would fall!

In essence, if "stiff" taxes were imposed then we choose to artificially disadvantage ourselves in the global economy.

From China's perspective, decreased US oil consumption for whatever reason is a competitive advantage for their economy. Further evidence: China's recent call for the US to make the first move towards curbing CO2 emissions - or they are not interested. Nevermind the fact that the US uses oil 20x more efficiently.

Diversity

Posner is much more right than he says. First, we need to give thanks.

Thanks because the sovreign wealth funds have got going nicely in time to save us from the consequences of major bank crashes; as Citigroup and UBS have demonstrated.

Thanks because the sovreign wealth funds and the central banks behind them have accapted the massive write-down of US debt built into the dollar slide, and taken it without a whimper.

Thanks because the oil-producing governments behind many of the sovreign wealth funds have driven uop the price of energy just when the world needed it, and when Western governments were (and are) politically very unwilling to force it up.

Second, look at the gift horse's teeth.

Becker is even more right than he says about the potentially malign effects on the countries owning them of non-transparent sovereign funds. the fore-runners of obscurantist sovereign funds were and are the private fortunes of the oil sheiks and princes. The odour of corruption around most of these is rank, despite the extravagent spending on the myrhh and frankincense of public relations in order to mask the stench of decay. Sooner or later, such decay becomes a cancer in the body politic.

On the other hand, a transparent soverreign fund, such as the Norwegians have, is just another type of pension fund.

Jack

CoalW: My guess is that energy consumption is inelastic in the short run. Consider the guy who has a two year old gas hog. He'd perhaps rather not have it, but would take too much of a hit on trading. Then, IF, he did trade, the hog is most likely to remain on the road somewhere for most of its economic life; nearly ten years.

Were we JUST suckers and fools or was something else afoot in creating this fleet of horrible gas guzzlers?

For the last ten years something over 2 million homes have been built annually, nearly ALL of them have been built with the min allowable efficiency HVAC and just ho-hum levels of insulation and concern for energy consumption; those built to "Energystar" standards are only slightly better. As retrofits are costly not much will be done in the short run, but, at least, at the higher energy costs, a few consumers ARE beginning to ask, and who knows? perhaps some might eventually tradeoff a bit of size, gloss or stone kitchens for more efficiency; but it can not take place overnite.

Leadership COULD do something though! As we sink into recession what could be better than spurring the economy by encouraging retro fitting of aging leaky windows, HVAC, solar, et al? Here's work that would have to be done by US workers, most likely many who are "last hired and first laid off", the sale of US made windows, insulation, solar, HVAC, and the lessening of sending our hard-earneds abroad for costly imported oil and LNG.

neilehat

Just an observation. "Sovereign Funds" kind of reminds me of when a bank calls itself "Fidelity Trust". We've always called these things, GCF's (Government Controlled Funds). Interseting that no one has called attention to the fact that the State of Alaska is in the top twenty of the list.

As for their development, what does one expect? After the 'POL's' have bought themselves all the Rolls, Bently's, Mercedes, private jets, villas on the South of France, platinum and jewels, solid gold plumbing fixtures and the like; what else can they do with all that money? They certainly can't eat it, they might be able to jump start the infrastructure of the country in question and/or invest it. As for the investments why not? All of the oil consuming nations of the world can certainly do with a massive cash infusion. As for any problems, that's easily handled by the freezing or nationalisation of any and all investments. Such as most of the oil producing/exporting nations did to various firms that developed the resource in the first place.

There is one problem that needs to be take into account and that is, the developing ability to manipulate the money markets for given political ends. Something the nations of the world need to be on the watch for.

Jake

Judge Posner's call for a stiff tax on imported oil could free us from dependence on foreign oil, if it were coupled with legislation unleashing the American oil industry to get petroleum whereever it may be found on our continent or the continental shelves. Drill in ANWR, for crying out loud, and eat any caribou that may get in the way. Even better, let the granola eaters out in California enjoy the sight, as they sip their lattes, of offshore drilling rigs that will contribute to our Nation's prosperity and security.

neilehat

Jake, Taxation? I hope not. Are you aware of the pricnicples of "Elascticity/Inelasticity" in regards to "Supply/Demand". In the case of energy consumption, It does not fit the Elastic Model, more than anything else it is Inelastic in both supply and demand. Taxation only works without severe harm to both individuals and economic systems when the product in question fits the Elastic Model. Which energy and its consumption does not.

Akshay

its indeed a well thought off writing...
we really need to think more on the topic before coming to any conclusion...

Akshay Singh
Website designing and development company
www.HugeH.com

Robert Ayers

Judge Posner remarks that "fossil fuels [are] a
major culprit in global warming", as though that
was a well-known fact. There are many reasons
to wean ourselves from a coal and oil based energy
infrastructure. "Global warming" should be far
down the list, if it is on the list at all.
Many bad side-effects of coal and oil are facts,
such as air pollution and the funding of
Wahhabi extremists. The causes of the mild
warming since 1970 (and the cooling that preceeded
it) are still being investigated and argued.

Jack

Neil: I'd think you're wrong on both sides of the supply/demand "inelasticity"

First let's consider energy supply. Just in the couple of years of rapacious fossil fuel pricing, I've noticed more drilling activity even in old and marginally productive areas. I've also noted lots of effort to produce legitimate alternatives. There are also many more efforts toward conserving more of what we waste, though in such a short run the savings have only slowed the growth in consumption and gone unnoticed.

For examples? Perhaps look to Europe where high taxes have been on energy for a long, and more importantly, steady time.

As for "harm" I see none. Just as Clinton's BTU tax was proposed before increasing income taxes to lower a dozen years of deficits, we are again in a position of having to raise SOME tax or another to pay the bills. Surely the BEST one would be that of taxing fossil energy as all of the reduction in demand (at the higher total price) would come out of imported oil and LNG which would have some small effect on our balance of trade.

As for such a tax being regressive that could be adjusted easily with credits to lower income earners, who would still have incentives to lower their consumption.

BTW I HOPE you are wrong! Take a look at the charts. To the present day the two trails ascending the supply-demand mountain have been parallel, and still we've seen a tripling of price, just imagine what "they" will do to us when if the demand continues to soar and the amount supplied becomes substantially lower.

And lastly IF oil consumption is not elastic with respect to price, who buys it when lower income folk can't afford to drive?

St Darwin Assissi's Cat

I love Posner's writing.... Becker writes convincingly but he's never a Posner....$20 trillion dollars of nontransparent money with people like Osama Bin Laden wanting to convert the world to his culture, apparently any way he is able ....Accelerating climate change and global warming conditions .... the less liquid an asset the better a hostage it is ....rock on.

neilehat

Jack, Let's cover your rebuttal paragraph by paragraph. Don't trust the "supply/demand" curves you've seen published. The analysts that have put those things together aren't bright enough to break with the classical curve models and one ends up with a distorted model and picture of the real world. When it comes to energy supply and demand at times the curves themselves are back bending and even vertical. Not the upper left to lower right or lower left to upper right views classical elastic models use. Hence the "inelasticities" of the real model.

As for the European example, it's like comparing "apples and oranges". In Europe they have much less distance to travel than do North Americans. In addition, they also have a well developed and subsidized mass transit system unlike N.A.. This forces N.A.'s to purchase individually the energy requirements. Additional taxation will only drive up the cost to individual consumers driving many out of the market. Working great harm, because to do anything, reqires the ability to get from point A to point B.

As for the continued consumption of energy, there is still a huge industrial/business base that is still dependant on energy. This will continue, unless we all move into the cold and the dark to starve. To me, a greater harm.

neilehat

Oh! BTW. Somehow, we need to ge back on the topic. ;)

Jack

Neil: Thanks, and though I'm in an agreeable mood this post-ice storm Friday with the ELECTRICITY on after 4 days, I've these remarks:

First, I'd hope that the energy policy related source of those piles of hot money we've shipped abroad is closely enough related to what to do with the gobs of capital that I hope I've not strayed too far from the topic.

I may not be getting your first paragraph, but think it's along the lines of if one doesn't like what their gauges are reading then the solution is to fly by the seat of our pants? Anyway, by way of answer, I've yet to find my first price inelastic product.

As for looking to Europe for some guidance, perhaps it's more like comparing oranges to tangerines. Sure, "the distances are shorter" though it too is quite a sizable continent. Just as surely their long history of hefty fuel taxes has limited suburban sprawl and lengthy commutes of one person to a 6,000# hog. In fact they have had a head start on the future for their blessing in disguise of never having the cheap and readily available oil and gas that gave us our wasteful habits.

As for mass transit, I'm equally sure that is an area in which we are deficient and may well learn something from the region of strong currency and, affordable universal health care as well. More of our great cities will likely be forced to follow the path taken in LA where at massive cost they are rebuilding transit along the very routes of the old "Red Line" which was cold-cocked and sent to the grave by GM and other interests just half of a cheap energy era ago.

Beginning late though has its advantages; we should be able to lure transit customers away from traffic jams and road rage episodes with transit designed with car-like comforts. As trains are very fuel efficient there is no reason not to have, at least, airliner-like seats, a built-in I-phone, Panera, McD's or whatever on board, and at the terminals. Today's "info-age" employees might arrive with their e-mail and first calls of the day accomplished.

Another opportunity would seem that of improving railroads for delivering freight across the expanses of our large country. The energy used by ten trucks will pull 50 or more rail cars each with half a dozen "lift off vans"...... perhaps a 20-30:1 energy advantage and substantially less labor costs. Trains are already powered by electricity (diesel-electric) so it doesn't seem too far-fetched that they could be run, or assisted, in many parts of the nation on surplus wind energy..... an energy source that costs only US labor and capital to construct and add to the grid.

As for taxation, especially today's "conservatives" (quotes due to confusion as to what constitutes a "conservative" these days) are want to say "What you tax you get less of". To which I say "Great!" Instead of increasing taxes on the very renewable, labor and creativity of the individual, why not shift some of that burden to irreplaceable natural resources? Or do we think those who designed the income tax a century back achieved perfection for all time?

As or our industrial base, some who favor hefty taxes on energy (Gspan for example) would cut industry something of a break, but it's my view that a fossil fuels tax phased in over time would inspire industry to look at their own processes closely as well, with the result that our industrial base would, as Europe's, be less vulnerable to energy cost spikes as they too adapted to the era of post-peak oil.

Lastly, were we to reduce our energy consumption by 20% or so, we'd be North America or America independent and not require the shipping of LNG tankers or making massive contributions to the worrisome "sovereign funds" of M/E sheikdoms. I'd be happy to send some to Mexico to revive their ailing sugar industry and have them provide some of that mandated ethanol percentage as sugar holds and 8-1 advantage over corn in the production process.

Jack

ChinaCoal;

"The EIA reports that nine years ago retail gasoline sold for 94 cents a gallon. Today the average price is $3.07, an increase in price in real terms of 165% or an average real annual rate of increase of 6%. Nevertheless per-capita gasoline consumption is practically identical: (9244/303)/(8310/272) = 1. Nine years, is also plenty of time for people to adjust their lifestyles (move, buy different cars, etc...) if you suspect a lagged response."

.......... but the price of gas has doubled in just a little over two years, not much time to get gas hogs off the highway. Even when one guy sells his it goes to another user willing to pay for the gas in return for the lower price; perhaps a commercial user of a P/U or a lower mileage private user but it's still out there. BTW a flat consumption per consumer seems perhaps and improvement in itself; today the length of average commute is the longest in our history which might have caused per capita consumption to rise unless folks are trying to minimize the economic impact of their lengthy commute.

My anecdotal observation has me concluding, that two years ago the perception of a temporary?? $1.70 was not enough to create change while the perception of a three buck, or worse, future will create substantial change.

BTW there seem many here who do not understand how strapped households of median income (just under $50k per household) and that half of all earners below that figure are; they simply do not have the discretionary income to ignore a doubling of their gasoline and home heating and A/C costs. Something has to give and my guess it's the 12 mpg super-sized P/U's and SUV's.

I doubt that our limp-spined pols have the stuff to tax fuel when it is high, but would predict that if they did we'd see a sharp drop in consumption followed by lower oil/gas prices, in effect having "OPEC" and the entire energy cabal pay most of our gas tax.

Jake

While consideration of elasticity is an important point, Neil focuses unduly on consumption of energy. My point is that an oil import tax would provide incentives to domestic oil companies to wrest more oil that we already own from the ground. (I recognize that this incentive would decrease over time as the equilibrium price of oil adjusts to reflect the oil import tax.)


Further, revenues from an oil import tax would allow the government to reduce marginal income tax rates on wage and salary earners. Pricing in the employment market is extremely elastic and, thus, tax relief for wage earners tends to produce economic surpluses that exceed the nominal losses of tax revenue.


To summarize, imposing an oil import tax and using the revenues to decrease marginal income tax rates on earned income would (1) enhance domestic oil production, thus increasing our national security, (2) give working consumers more take-home pay due to lower personal income tax rates, and (3) not materially affect energy prices generally (bearing in mind the economic effects of the policy I suggest are distributive, not allocative).


Put simply, Neil, the notion that energy and its consumption do not fit the "elastic model" (whatever you mean by that term, though I give you the benefit of the doubt), does not stand up under close examination.


Full disclosure: I do not reasonably expect that our dysfunctional Congress can enact sensible legislation on energy policy, such as a tax on imported oil that is used to encourage domestic oil production and reduce taxes on employment income, in our lifetimes. Leaving "energy policy" to Speaker Pelosi and her cronies is a joke. To be fair, however, the current Congressional Record provides lots of fuel that can be burned in trash cans on street corners to keep the electorate warm.

Jack

Jake, Ha! we share about the same opinion of Congress being far too cowardly to face the wrath of their constituency even though the slightly bitter medicine would be a great boon to our nation as a whole, as well as the world.

If we can flatten our consumption curve, prices are likely to fall (assuming anything remotely akin to a market mechanism is working in energy) and there would be oil for those of other nations. (Consider the dislocation of $90 oil in nations where that's a week or a month's total pay)

The "cronies" I assume to be the money fueled lobbyists who are distorting most of our priorities in favor of their clients, regardless of party.

I doubt we can get away with an "import tax" ie tariff due to being wound up in WTO, GATT, etc. but surely it's our choice to tax oil or NG across the board. I'm not sure how oil or LNG contracts are set up, but I'd like to think that any reduction in consumption would be taken out of the most distant markets, thus favoring domestic, NA, and perhaps SA producers.

As for the elasticity issue, we should remember that President Carter led the way to the first CAFE standard, and the US and the world lowered consumption. While cause and effect might be tough to demonstrate from one event, it appears cash starved OPEC ministers began to cheat on their production quotas and prices fell below $10 and slowly crept up to the $20 range.

An excerpt:

The "Energy Policy Conservation Act," (EPCA) was enacted into law in 1975 and established Corporate Average Fuel Economy (CAFE) standards for passenger cars and light trucks. The goal of the EPCA was to double fuel economy by model year 1985.

The CAFE standards started at a shamefully low level in 1978 when auto companies selling cars in the United States were first required to meet a meager 18 mile per gallon (mpg) auto fleet standard. In 1981 Joan Claybrook, now the President of Public Citizen, was the Administrator of the National Highway Traffic Safety Administration (NHTSA). As the administration of President Jimmy Carter was winding down, Claybrook advanced a NHTSA notice that called for fuel efficiency standards to reach 48 mpg by 1995. Interestingly the notice pointed out that the auto industry itself said it could reach in excess of 30 mpg fuel economy by 1985 with GM saying it could do 33 mpg. The Reagan Administration didn't waste any time and withdrew the NHTSA notice just three months after it was issued. After the original Congressional mandate of 27.5 mpg took effect in 1985, the Reagan Administration rolled the standard back to 26 mpg in 1986. Finally in 1989 the first Bush Administration moved the standard back to the 1985 level of 27.5 mpg. There was no improvement in the CAFE standards under the Clinton Administration."

...... yes, and even worse was the loophole of building lots of obese station wagons and "light trucks" under the much lower mileage (21 hwy) CAFE standard, and blackest of all in terms of energy policy was Congress maintaining the very juicy tax break for 6000 GVW "trucks" that made business use of Hummers, Navigators, Escalades etc often cheaper to own than a mid-range sedan. (This one ended last year.)

neilehat

Jake, Have you cut your electrical consumption (Light, toys, computers, heating, cooking, etc.) or natural gas consumption (petrochemical product purchases or home heating) or gasoline consumption by any significant amount due to price increases (due to taxation or whatever)? If the answer is "no", you're proof of the non-elasticity of the market or it's basic inelasticity.

E. Poole

Posner raises many fine points, though he speaks more to the interest of the USA and perhaps other net importers of oil than citizens of countries with sovereign funds.

However, I was a little surprised to see the Mercantile slant on energy policy. Why tax imported oil? Why not tax all refined products at close to European levels, adjusting relative tax rates to account for different rates of external damage, e.g., carbon emissions and small particulate matter emissions?

Why be in such a rush to exploit American oil in ecologically sensitive areas when foreigners are so willing to sell their oil? Leaving it in ground solves the tragedy of the commons and the related time inconsistency problems that have plagued American natural resource management.

Let the Albertans destroy their boreal forests and poison the fish in their lakes. In the realm of natural habitat destruction, other nations have much catching up to do relative to the USA.

Jake

Neil --

To briefly respond, the short answer to your impertinent question is: "No." The reason, of course, is that I have worked hard all my life and have earned the right to make my consumption decisions as I please. In contrast, you merely spout the term "inelasticity" without any clue what it means. A sensible reader might surmise you are a Leninist. (I don't term you such, but you sure go out of your way to sound like one.)

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