Why We Should Be Rooting for $200 per Barrel of Oil--Posner

As Becker explains, we cannot predict the future price of oil. But it is unlikely to rise in the foreseeable future to $200 a barrel, especially if we think in inflation-adjusted terms. Oil prices in real terms have fluctuated a great deal. In December 2007 dollars the price of oil was below $20 in 1946, above $100 in 1979, and only about $10 a recently as 1998. High prices affect both demand and supply; the recent price peaks have already reduced demand for gasoline in the United States and increased efforts to discover and exploit new oil fields. The United States has large untapped oil reserves both offshore and in Alaska, and there are many other untapped reserves elsewhere in the world. Supply is responding to the high price of oil and will respond more. If Iraq ever stabilizes, its output of oil will increase. Were the world price of oil to rise to a level close to $200, both demand and (with a lag) supply would respond. Oil trapped in sand and shale--a potentially very large supply--would become economical. In the longer run, very high oil prices will further stimulate the development of alternative fuels. Major political or natural catastrophes could of course alter the picture. Middle eastern oil supplies are vulnerable to the ever-present threat of war in that region, and the oil industries of Venezuela, Nigeria, and possibly even Saudi Arabia are vulnerable to political unrest, civil war, or terrorism. I would like to see the price of oil rise to $200, despite the worldwide recession that would probably result, provided that it rises as a result of heavy taxes on oil or (better) carbon emissions. The taxes would jump start the development of clean fuels, and the financial impact on consumers could be buffered by returning a portion of the tax revenues in the form of income tax credits. That would not reduce the effect of the taxes on the demand for oil or the incentives to develop alternative fuels, because the marginal cost (the production and distribution cost plus the tax) of oil to consumers would not be affected. Higher oil prices are necessary to check global warming, reduce traffic congestion, and reduce dependence on foreign oil, so much of which is produced by countries that are either unstable or hostile to the United States. Heavy taxes on oil would reduce not only the amount of oil we import but also the revenue per barrel of the oil exporting nations, so there would be a double negative effect on those countries' oil revenues: they would sell less oil and earn less per unit sold. The reason for the latter effect is the upward-sloping supply curve for oil. Suppose the first million barrels of oil can be produced at a cost of $1 per barrel and the second million at $2 per barrel. If total demand is one million barrels, the suppliers break even: they have revenues of $1 million and costs of $1 million. If total demand is two million barrels, the suppliers have revenues of $4 million (because the price of all barrels is determined by the price that the marginal purchaser is willing to pay) but costs of only $3 million ($1 million for the first million barrels, $2 million of the second). The lower the price of oil received by the oil producers (that is, the price net of tax), the lower their net income. Unfortunately I cannot see a confluence of political forces that would make heavy taxes on oil feasible. We seem to be experiencing a democratic failure, in which long-term problems simply cannot be addressed.

Comments

[Daniel]

I would like to praise Judge Posner for his intellectual integrity. The reality is that high oil prices are needed to offset an impending economic disaster that global warming would bring about. Austrian economic and libertarian (Cato) political responses to the debate over how to combat global climate change are increasingly becoming absurd and ludicrous. The argument that government intervention to combat climate change is not needed or will inevitably do more harm than good places political ideology over scientific and economic realities.

The worst case scenario is that the government will refuse to undertake the required measures, the higher the costs will be in the not so distant future. The reasoning behind this is simple. As atmospheric ghg concentrations rise, deeper cuts in net emissions will be required to avoid abrupt climate change. And, there is a certain threshold concentration at which avoiding abrupt climate change will not be possible - and we are probably much closer to that threshold than people think. Once this threshold is reached, we will not only have to make emissions cuts to achieve further arming, and the next threshold level, but we will also have to take highly costly adaptation measures, possibly even risky geophysical measures to artificially reduce the Earth's temperature.

[Jack]

A asks: Would the income tax credits be regressive or progressive? How would this work? This is a very interesting idea but hard to implement, and many people in the U.S. probably do not understand it. It could be easily abused: income tax credits for people driving suburbans (tax reduction), and no incremental tax benefit for someone already driving a 4-door compact car and earning minimal amounts of money.

..... since I've long favored putting a portion of our tax burden on fossil fuels I'll try to give you an answer, or at least a scenario.

.......... As you say, tax credits are increasingly a break for upper income folks as lower incomes have so little tax liability anyway.

But if Congress asked the IRS to make fuel taxes revenue neutral, they could come pretty close. They'd lower the income tax accordingly....... a small percentage for upper incomes (as the fuel tax would be a small percentage of a large income) and a larger percentage for lower incomes and finally at the bottom a rebate or addition to the Earned Income Tax.

Thus everyone would have cash in hand of the average amount of the increased fuel tax. Beyond that there would be winners and losers. Those driving the compact short distances would have more money to spend or save, while those driving long distances in gas hogs would pay more than they received. Just what the doctor order if you're goal is to conserve fuel and limit CO2.

Those who "have" to drive long distances for business? I'd make them the same deal, less income tax, and no break on the fuel taxes, either figure out how to do it more efficiently, profit less or pass on the cost to the consumer of your product.

[Jack]

Dan sez: "The reality is that high oil prices are needed to offset an impending economic disaster that global warming would bring about."

.......... geez Dan let's not turn filling the coffers of OPEC and a cabal of speculators into a dose of cod liver that tastes awful but is "good for us".

If higher prices is the only way to wean us from our wasteful habits (and I think the price has to be fairly high for a long time to accomplish the task) we should rely on some mandates such as CAFE standards and improving the energy conservation portion of our building codes and a system of taxes that will go into our coffers instead of those of OPEC. Now that it's politically "too late" the way to sell fuel taxes is to make it a revenue neutral swap from income taxes and even then it might not work.

But let's hope there is enough of our democracy and wisdom in our citizenry that we can figure out a solution less costly than emptying our pockets into the vaults of oil producers.

[neilehat]

Two hundred dollars a barrel? Cool! Will it kick in the "Necessity is the Mother of Invention" rule? I doubt it. The populous of the Nation has become simple consumer units. Devoid of any technical aptitude and general productive capabilities.

[richard cohen]

we have not discussed the price in lives and money.the usa has a huge army based in the gulf.that is an additional cost to the price of oil.

[cohen]

there has been no leader in the united states prepared to explain to the nation in clear terms the deep problems that ensue from the vast export of our resources to those who wage war on us.
let the explanations and the ideas be presented to the people of the united states.then let us see if they reject large and significant taxation on oil.

[Jake]

Posner writes:

"I would like to see the price of oil rise to $200, despite the worldwide recession that would probably result, provided that it rises as a result of heavy taxes on oil or (better) carbon emissions. The taxes would jump start the development of clean fuels, and the financial impact on consumers could be buffered by returning a portion of the tax revenues in the form of income tax credits."

Coase, Hayek, and Friedman scream from beyond the grave in protest of Posner's ill considered views on taxing fuel.

[neilehat]

Jake, As in any Academic field, assorted hypotheses and theories, always become the most popular and widespread for a period of time and then disappear or become a footnote. This I call the "Hula-hoop" law. Coase, Hayek, and Friedman fall into this category. Many of the economic problems we confront today are due to the widespread application of their hypotheses and theories.

Perhaps, it's "time to disenthrall ourselves and begin to think anew and act anew."

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