Capture the rent!
A former Shell exec has been making news with a prediction of $5/gallon gasoline in 2012. I don’t know if he is right about 2012, but I am sure he is right about $5. This is inevitable, given the finite resource and (we hope) economic growth over the next few years (not to mention inflation).
The question is this: who will capture the “rent”? Rent is the excess return over the cost of production, distribution, refining and normal profit (which in some parts of the world is more like $5/barrel, at a time when oil is selling on the world market at over $90/barrel). As things stand today, most of the rent goes to non-U.S. oil producers abroad, where production costs are lower than in the now declining oil fields in the U.S.
At current prices, the U.S. is sending something more than $400 billion/year abroad to pay for oil imports, much of it ending up in the pockets of people we would not want to enrich if we thought about it: Iran and Russia foremost, Venezuela secondmost. Even if we don’t import oil directly from them, U.S. demand contributes to the market conditions that enable them to sell into the world market at $90/barrel a product that costs them far less. Money and oil are fungible: any significant decline in U.S. demand would affect the price worldwide and reduce the flow of rents to oil producers worldwide.
Enriching antagonists is not the only problem. Protecting the sea lanes through which oil is transported is costly. As things stand today, the costs are charged to the U.S. taxpayer in general, not to oil users. Colleagues estimate these costs are $10-20/barrel of U.S. consumption. I’d like to see those costs paid by those who use more of the oil, not by those of us who use less (I am writing in a 68 degree room, with two sweaters on).
The obvious way to do this is with an oil import fee. That, however, turns out to be neither wise nor possible. Not wise because it would protect U.S. producers and encourage domestic production. Wouldn’t it be smarter, the price being equal, to use someone else’s first? Not possible because the United States, in its wisdom, long ago “bound” the tariff on imported oil. This means we agreed not to increase the tariff, which is very low. If we impose an oil import fee, we would have to compensate others in the form of sharply reduced tariffs (and increased imports) for doing so. If we refused, the World Trade Organization’s rules would allow others to retaliate by raising their tariffs. Not a good way to go for a country in need of massively increasing its exports.
The better way is to charge fees on all oil use, or if you prefer for environmental reasons on all carbon use. This would “capture the rent” to pay for the associated security, environmental and other costs (including road infrastructure) associated with the use of oil.
One argument against comes from the left: poor people spend more of their incomes on oil and energy generally than rich people, so an oil or carbon tax is regressive. This can be fixed, in part, by using some of the income from the tax to provide benefits to people with lower incomes.
Another argument against comes from the right: we wouldn’t want to do anything to discourage exploration and production of oil. I don’t see why not: conserving a finite resource for future use sounds the right way to go to me. But in any event much of the money we send abroad to pay for oil is ending up not in oil exploration and production but rather in Dubai real estate and other worthy causes.
Why is this subject not discussed more often? Well, it is: Tom Friedman raises it regularly in the New York Times, but there is absolutely no resonance in the body politic. Gasoline taxes aren’t the third rail of American politics, they are the train. No one wants to get hit by it.
Barack Obama is too smart not to know all that I have written above, but to my knowledge he has not breathed a word about gasoline taxes since becoming President. I can only hope that in a second term he would break the spell and capture the rent, but I don’t know where he’ll find a Congress willing to go along. Maybe a lame duck in 2014?
If he needs inspiration, he might turn to Iran’s President Ahmedinejad, who despite strong opposition is cutting oil subsidies sharply and allowing domestic product prices to rise (by a factor of 4) while compensating with payments to lower-income Iranians. Of course he can do that because the increased prices put money directly into the Iranian government’s pocket, which is what oil taxes would do for the U.S. government. Is Ahmedinejad more courageous than Obama?
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