Heavy taxes on oil would simply create a new market imbalance--taking money that should be returned to the supply-side for re-investment for more energy, no matter what form--that the market would have to make new adjustments for on the supply side, in order to compensate.

I don't want to ride on any bicycle you manufacture. Going downhill I'd be likely to beat myself to death.

Oregonguy, Well there is lots to discuss here, including the direct and political effects of third worlders who earn just a few dollars per day not having enough earnings to buy even a gallon per day if they devoted their entire earnings.

Our Profs are vague on who would implement "heavy taxes" atop the highest oil prices of the oil era. Obviously, to the US consumer the current prices represent a stiff tax on oil, albeit one paid into the sovereign funds of various nations.

But is there evidence that our oilcos are taking their "supply side" windfalls and investing them aggressively in new reserves or even "alternatives"? (supplements?) So far I'm seeing news of Exxon buying back their own stock, and that oilcos have thousands (three if I recall) of licenses to drill but appear to be stock piling them.

Having lived through the last two "crises" and for some reason, always thought we should conserve exhaustible resources I've favored shifting some of our general tax burden onto nonrenewables since the 60's.

Had we done so and implemented a gradually increasing tax on fossil fuels with an equal lowering of income taxes, over those last 50 years billions of economic decisions would have been made that would have resulted in a very different fleet of cars and those millions of homes we've built too, would have been constructed more efficiently and perhaps smaller and closer to the occupant's trading areas.

It's easy to imagine, also, that new tech and adoption of solar, wind etc would have ramped up much more rapidly over those years had there been a known path of steadily increasing fossil taxes. (Much as has been the case in Europe) In short "cheap oil" policies have flown us up a blind canyon where we find ourselves today with a fleet of cars and millions of inefficient homes that look like the work of oil conspirators.

Today, it's too late for a major shift in fuel taxation; can you imagine the nanosecond political lifespan of anyone proposing adding taxes to $4 gasoline even if the fuel tax were made revenue neutral for most people.

Lastly, in regard to "supply side" theories, I don't believe there is a functioning "supply and demand" market at work in the world oil supply. If there were, I'd expect that a rapid run up from $20 to $120 would require dire shortages and rationing in major "markets". Instead, I'm told our own storage facilities are well filled and "we?" are still putting oil into our national reserves. If the price is being "bid up" who is doing the bidding? While as the Profs say, consumption in the US, short run, may be inelastic but can the same be said for consumers in much poorer nations where a tripling of gas prices is not just an annoyance and a hardship for some, but takes a farmer or cabbie's whole paycheck? So who's bidding?

Lastly, it still seems that our cheapest, cleanest, most readily available "alternative" is conserving more of what we waste. (US has 5% of the world's pop but hogs 25% of all the energy consumed.) In the last oil crisis Carter led the way to the conservation efforts that finally broke the OPEC cartel. Were the current president to make a case that it would be patriotic to conserve just 5 or ten percent of what we consume, I suspect that goal could be accomplished with no hardship at all.... unless one thinks pumping their tires up to sidewall pressures or installing half a dozen CFL bulbs is a hardship.

How high do oil prices have to rise before the breeders of the world stop reproducing?

Tax shifting won't ever happen. What you'll get is BOTH higher fuel/carbon taxes and NO let-up in income/payroll taxes.

That is exactly what happened in Europe and will happen here. That is why you never hear any politician jump onto the tax-shifting bandwagon -- even the Democrats.

Lord: I wonder if you've coined a term for a "democracy" in which trust has fallen so low that all attempts at reform are seen as just another means of "them" screwing "us?"

And, Ha! I'd hardly expect the current batch of Republicans to do anything about oil price gouging and wonder if they might review the principles of conservatism at some point?

As for European taxes, it would seem that what they may have left after PAYING their bills, given the recent exchange rates, will provide many Euros with the means to take an economical vacation in the US this summer.

Since Europe, Japan and many others are far more efficient in terms of fossil fuels consumed per unit of GDP should we expect our downward spiral to build momentum?

Perhaps 60% of today’s oil price is pure speculation

............... thoughts??? Sovereign funds "investing" in oil futures?

The price of crude oil today is not made according to any traditional relation of supply
to demand. It’s controlled by an elaborate financial market system as well as by the four
major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure
speculation driven by large trader banks and hedge funds. It has nothing to do with the
convenient myths of Peak Oil. It has to do with control of oil and its price. How?

First, the crucial role of the international oil exchanges in London and New York is crucial
to the game. Nymex in New York and the ICE Futures in London today control global
benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via
oil futures contracts on two grades of crude oil—West Texas Intermediate and North Sea
Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai
crude, is more or less a daughter of Nymex, with Nymex President, James Newsome,
sitting on the board of DME and most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value as much of crude oil produced
in global oil markets each day. The Brent price is published by a private oil industry
publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a
benchmark for pricing the crude they produce. Brent is a key crude blend for the
European market and, to some extent, for Asia.

WTI has historically been more of a US crude oil basket. Not only is it used as the basis
for US-traded oil futures, but it's also a key benchmark for US production.

http://www.globalresearch.ca/index.php?context=va&aid=8878

Judge Posner:

I hope that you will reconsider your thoughts from this post. You and the government elites do not understand the information reflected in the prices as well as the aggregated firms of the markets. Price signals, untampered with by government's limited time horizons, will best determine the shape and revelation of these "alternative fuels."

Posner is right: the price of a barrel of oil should reflect its true social cost. Since the use of oil is related to the problem of carbon emissions, government should impose a high-enough tax on oil so that its price forces oil consumers to internalize the external costs of driving, etc. The problem, however, is which government? Many people in the developing world pay very cheap prices for oil (e.g., Venezuela, Egypt, etc.). Ideally, a carbon tax should be uniform and world-wide because global warming is a collective problem that affects all peoples

I see much merit in higher taxes on pollution-producing power supplies, such as oil. But global-warming, which seems to have occurred from 1900-1935 and then again from 1970-1998, and is not now occurring, seems like a poor reason for such taxes, since a) it is not occurring now b) it appears to be independent of burning fuels for power and c) it is not obviously harmful as opposed to helpful.

Paco....... that's right. And since WE are THE market for much of which is produced around the world, WE could impose the tax for those who don't when the goods cross our border. Such a tariff would violate WTO agreements, but! they are not carved in slate. Either we are serious about carbon or we are not.

Robert fortunately the policies related to "peak oil" are much like those concerned with warming; conservation, conservation, alternatives, more conservation, taxing fossil fuels to make alternatives and conservation efforts take place more rapidly and more conservation!!

Could someone point me to a complete version of the Goldman Sachs analysis that predicted super spikes in the price of oil? Given the concept of conscious parallelism, it occurred to me that this analysis might be evidence of 'price leadership'.

I believe that I heard that GS also supports speculators in this market, thus providing a financial interest in seeing prices rise and having the party last a lot longer. Does anyone know if this is true?

Someone with a legal interest in anti-competitive corporate activities might also want to spend a couple of hours researching this.

His Honor's hope for $200/brrl oil is misplaced. To achieve the counter-economics he suggest, the hope should be for $100/brrl oil and $7/gal gasoline.
Presume for argument sake that on the day of the "Mission Accomplished" foto-op, that it was announced that gasoline in the U.S. would go up to $4 or $5/gallon, and that only oil from listed, non-antagonist producers would be imported for domestic use (still could buy elsewhere for national security use). Any net of the oil to gas profits would be used to develop conservation and alternative energy technologies, i.e., the $3 difference between what gas cost 5 years ago and the new mandate $5/gal price. Where would we be today, if that had happened years ago, when we thought it was "Mission Accomplished"?
We'd be paying for gas, what we now pay or will pay soon for a gallon, but the public would have reaped the windfall profits, and used that for measures to avoid ever-increasing gas prices. Also, the cost of oil from antagonistic producers might have had to be kept low due to our nation refusing to fund their agendas.
That's all 'what if' and of no use now, but letting the oil bulls runs free and the price/barrel to have no backstop is asking to be gored.

Posner makes an excellent (and brave!) case for taxing the usage of oil so that its externalities are accounted for. As noted, the recent scope and scale of market changes has proceeded far faster than can be culturally assimilated, as the lifestyle implications are broad and the traditions well-rooted. It will take a few years of steady high prices for expectations to adjust and politics to move on to doing something productive on the subject. Fortunately, it seems the environmental aspect may be addressed indirectly through a carbon cap sooner than that.

I love Judge Posner's writing....I really like the idea of using heavy taxation to jump start green industry ... and his assessment of political forces or democracy not being able to 'confluence' is genius! Paying for emissions is critical ... what will happen to climate change as a result of the current China weather?

We may be paying $200/bbl already if you factor in the distributed cost, paid by the U.S. taxpayer, of the U.S. Navy and Air Force hardware and personnel who enable tankships to navigate the Persian Gulf and Arabian Sea without being sunk by terrorists' RPGs.

Under ideal circumstances we would expect the markets to work out the pricing of petrochemicals net of cost to acquire crude stock and refine it. But the circumstances will never be ideal as long as China keeps using money spent by Americans to buy down crude prices (I saw $40/bbl on the Yahoo XOM message board) in order to encourage more Chinese to acquire and operate motor vehicles. Mexico (Pemex) subsidizes its fuel consumers, too, though its producing oil fields are in sad shape for poor conservation and stewardship - like East Texas early last century.

The U.S., British, and Dutch-based vertically-integrated petrochemical behemoths could break the speculative oil traders who are profiting on fear of anticipated scarcity. Those companies would be delighted to get the price of a barrel of crude down to reasonable levels if for no other reason than they could start making a profit again downstream. Independent refiners, too, would sleep better. But this is something American law won't let them talk about.

Some brave political soul (oxymoron) needs to give the country twelve months to make adjustments to NO FOREIGN OIL. We would adjust. Imagine, our balance of payments would improve, there would be less plastic and trash from packaging, healthier nutrition (less obesity, cleaner air, better public transport, etc. Families might be more cohesive (less scattered)and life might return to something more proportional to humans. The chances of any of that are minute when the rascals are increasing their rascality at every level. Imagine 500B to 750B being spent on the presidential election. Politics IS the problen ala P.J. O'Rourke in a recent Cato publication.

My understanding is, Chicagoan's don't accept business cycles, bubble and malinvestment theory of the Austrians. I can't think of one famous Chicago economist who called the dotcom a bubble or for that matter housing recently. But I see many of them incessantly calling commodities bubble and oil bubble. If you watch Kudlow and Company, you will know what I am talking about. Why the double standard?

It would appear that whatever is done, Iran cannot be allowed to be the dominant personality in the Middle East, otherwise 1929 will look like an economic cakewalk for the US, according to a former retired USAF guardian of the missile button, located in Colorado.

Jim..... there's an experiment taking place that we could watch. Juneau's power lines were taken down by severe snow slides that will take some 6 months to repair. Their back up is diesel which will increase electrical bills five-fold. On the news alone, even before getting the bills Juneauites have cut consumption 30% and are just getting started.

Here's the story:

http://www.adn.com/news/alaska/story/390413.html

BTW the approx cost of the presidential election is in the millions not billions. The billion is small spuds; were it paid by all of us it would amount to $10/household and the billion would be saved back in an instant were they not beholden to the lobbyists and special interests that are funding them.

Jack,

There is no price gouging in the oil industry by the oil companies. There IS price gouging with regards to our own Federal and State governments and the nations that have nationalized their oil industries.

And if you want to pay more in taxes, fine. Do so. Just don't have the gall to insist that others should unless you are personally prepared to do the mugging yourself.

As for the euro, its doomed. The Germans will soon tire of bailing out Italy, Ireland and Spain when those bills come due in force.

And, all of those 'points' are just red herrings of yours since you don't want to acknowledge the point I was making in the first place -- that politicians won't 'shift' taxes. They will just heap more on us.

Lord;

"There is no price gouging in the oil industry by the oil companies. There IS price gouging with regards to our own Federal and State governments and the nations that have nationalized their oil industries."

.......... Interesting. I live in Alaska where just such a short time ago oil was quite profitable below $20. The royalty share going to Alaska, (the owners of the resource) of less than 20% paid for 70% of our state's public services. As the state partners with BP, Phillips and the others we know they were profitable too at $20.

There is no "supply and demand" reason that Alaskan oil should sell for $120 and I can not think of any commodity selling for that multiple of its cost of production. I'd term such a price as "gouging" though we do benefit very nicely from it; any thought of reinstituting the dreaded income tax has moved well into the future as Alaska's and BP's coffers are filled by those having a tough time being gouged.

I'd be interested in hearing how the US or the states are "price gouging".

I'm not a big fan of paying "more taxes" however it appears that we must either pay for our spending, or add it to the D E B T, pay interest on it while hoping that eventually more responsible generations will refrain from adding to the debt until it, again, returns to being much smaller relative to our GDP and the interest payments become much less of a burden than they are today.

I'm not well positioned to hold a position on the future of the Euro, though, back when it sold at discount to the dollar I remember certain factions predicting its weakness. My point though was simply that those whose policies have made them far less dependent on oil will reap good returns for their efforts when what they've had the foresight to conserve is selling for $120 or more in, admittedly, emaciated US dollars.

Given the costs of the war, the accumulated debt and the interest costs being the next biggest check we write after funding the military, I can't argue with "heaping more" on us as the debts are there waiting to be paid. But I'd think that principled capitalists of the right or left would embrace the concept of getting the tax burden distributed in a manner that is most rational in terms of creating and maintaining the wealth of our nation.

Just for fun, as policy boards are largely for entertainment, imagine that 50 years ago we'd shifted 50% of our income taxes onto non-renewable resources. (I'm not advocating such a large shift this is just for fun) And we'd have made fossil fuel costs non-deductible to businesses on the same income tax trade-off as for citizens.

On average we COULD drive the same car the same number of miles, but with the income tax relief and the higher relative cost of wasting energy we'd have made a billion market based decisions not to act as wastefully.

Today, we'd likely see far more of our goods moved by rail than air or truck, and perhaps rail driven by wind generated electricity? far more efficient buildings and a fleet of cars "designed" by the policy of higher fuel taxes. If we conserved only 25% per year, we'd not be concerned with M/E oil except as it impacted other nations. North America would provide its own oil.

In housing we'd have considered energy costs before building the 30 million? "dinosaurs" that have been built in the last 50 years and they'd be paying us dividends today. Some would have decided to live closer to town and work with a consequent advantage of not having to build as many freeways. Anyway, give it some consideration, surely many conservatives would welcome the income tax relief and the freedom of deploying what they have as they see fit.

Dear Gary and Richard,
My rather short stint with economics during graduation made me realize how inhumane and practical it is. You are rooting for a $200 per barrel range and say that this would just lead to short term fluctuations, while the world would be better off in the long run. But what happens in this "short span" is beyond the realms of economic understanding.

I am from a country which might be conveniently termed as a "third-worlder". Hence I know how much an additional increase of a single rupee pinches. The household monthly budget goes to the dogs every time there is a fuel price hike! Words like Hybrid engines and Gasoline substitutes may be a fad with the "developed" economies of the world, but I dont really see it happening here.

What would you answer to a family which has to revise its whole budget because the fuel cost shot up and they are not able to adjust their usage to a commensurable extent? Will you tell them that everything will be ok in the long run?

Thank you!

The rising gas prices are having a disparate impact on disabled Americans who use their vehicles as, in essence, their wheelchairs. Such persons cannot ride public transportation due to inaccessibility in its structure, design, location, operations policies. It would appear the failure to raise taxes to subsidize groups in need if gas price subsidies is not a failure of Democracy, but one of BIG LAW firms who lack the genius to bring a class action Americans With Disabilities Act suit against the States and Rehabilitation Act suit against the Feds to fully fund those laws to remove transportation barriers caused by gas prices locking disabled Americans out of accessible single vehicle accessible transportation. These anti-discrimination laws are exempted from the Unfunded Mandates Reform Act if 1995; thus, perhaps taxes must be raised on gas to subsidize the disabled Americans' need for gas prices (for them) of about $1 per gallon. Wealth transfer? Yes. Anti-Democratic, No. Fully funding the Americans With Disabilities Act is abotu as American as one can get.

corr: "if" = of
"abotu" = about

"and the financial impact on consumers could be buffered by returning a portion of the tax revenues in the form of income tax credits."

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.

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.

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.

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.

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.

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.

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.

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.

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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