Oil Prices, Offshore and Alaska Drilling, and Excess Profits Taxes--Posner's Comment

Although I worry more than Becker does about the environmental consequences of the production and consumption of oil, and although I want oil prices to remain high--indeed to continue rising--I largely agree with his analysis of the rival proposals for dealing with the present "crisis": allowing more drilling for oil on the outer continental shelf and in Alaska versus imposing an excess profits tax on the oil companies. I agree with him that the former is a good idea and the latter a bad one. But I will qualify my agreement by suggesting policy adjustments to minimize the adverse effects of allowing more drilling or of imposing an excess profits tax. Expanded drilling in U.S. territory (including our territorial waters) will reduce both U.S. dependence on foreign oil and the wealth of foreign oil-producing countries, many of which are hostile or potentially hostile to the United States. These are important benefits. But there are also significant costs. Any increase in the production of oil from the seabed and from the fragile Alaskan tundra will create environmental damage, both directly, because of the environmental damage caused by the drilling itself (such as, in the case of offshore drilling, the dumping into the ocean of "drill cuttings"—the solids that are brought to the surface in drilling an oil well), and indirectly, as a consequence of increased production of oil, because of oil spills by tankers, traffic congestion and highway wear and tear, and, most ominously, increased carbon emissions from the burning of oil as a fuel. Becker notes correctly that the less oil we produce, the more that foreign nations will produce. But given the high price of oil, increasing out oil production will increase total world production rather than just substitute for foreign production. So there will be more tanker spills and more carbon emissions if offshore and Alaska drilling is allowed, since the supply of oil will be greater. The problems created by an increased supply of oil can be minimized by an increase in the federal gasoline tax (better still would be imposing a tax on carbon emissions, since such a tax would create an incentive to reduce the amount of emissions per unit of gasoline consumed) calibrated to prevent gasoline prices from declining as a consequence of increased production of oil and hence increased supply. Already the shock of $4 a gallon gasoline has caused a modest decline in U.S. consumption of oil, yet $4 is little more than half the retail price of a gallon of gasoline in most European countries. Distances are shorter in Europe, and so U.S. gasoline prices would not have to double in order to make substantial inroads into our oil consumption. But they should not be allowed to fall as a result of increased world supply due to offshore and Alaska drilling. A gasoline or carbon-emissions tax must not be confused with a tax on the profits of oil companies, which, because of the uncertainties involved in exploring for oil, will, as Becker points out, reduce the incentive to find and exploit new domestic oil fields. (In contrast, a heavy tax on gasoline will increase the incentive to find energy substitutes for oil.) In addition, imposing excess profits taxes sends a bad signal to the business community: that success will be penalized. And there is a danger that the proceeds of the tax would be used to subsidize the purchase of gasoline in order to reduce gasoline prices. The demand would rise without stimulating domestic production, so we would have the worst of all possible worlds: high consumption of oil and increased dependence on foreign production. But in the unhappy event that an excess profits tax is imposed, at least it should be limited to profits from existing oil fields, to minimize the dampening effect on the incentive to develop new fields. Because the environmental risks of offshore and Alaska drilling are greater than those of drilling for oil on land in the lower 48 states, an environmental excise tax should be placed on the oil produced from offshore and Alaska wells. It is not enough to rely on the tort system to provide sanctions for oil spills. Many of the environmental effects of drilling for oil are individually too small to invite tort suits, yet the cumulative effects can be very large. That is true with respect to effects on fisheries and on the frequency of tanker spills. The more oil that is transported by sea, the more spills there will be, but it will rarely if ever be possible to ascribe a particular spill to a particular producer of the oil that was spilled. An environmental tax is therefore necessary to induce the oil companies to internalize the environmental costs that their activities impose.

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