How a Price-Smoothing Oil Tax Could Help Make This the Last Oil Price Shock
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More Slides from Ed Dolan’s Econ Blog http://dolanecon.blogsp ot.com/ How a Price-Smoothing Oil Tax Could Help Make This the Last Oil Price Shock Posted March 1, 2011 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers. An updated version of this presentation was posted November 13, 2014
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Oil price volatility is highly disruptive to the economy. The disruption could be minimized by a variable oil tax that prevented the price from falling through a given floor, but did not apply when oil prices approached a peak.
Transcript of How a Price-Smoothing Oil Tax Could Help Make This the Last Oil Price Shock
More Slides fromEd Dolan’s Econ Blog
http://dolanecon.blogspot.com/
How a Price-Smoothing Oil Tax Could Help Make This the Last Oil Price Shock
Posted March 1, 2011
Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics
classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.
An updated version of this presentation was posted November 13, 2014
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Oil Prices Spike Yet Again
Events in Libya and elsewhere in the Middle East have sent oil prices above the $100 mark yet again
Does the cycle of oil price shocks have to repeat endlessly, or is there a way for consuming nations to protect themselves?
Photo source: William Murphy, http://commons.wikimedia.org/wiki/File:Libyans_In_Dublin_March_In_Protest_Against_Gadaffi.jpg
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
How Oil Producers Protect Themselves
Producers like Norway, Russia, and Saudi Arabia have learned to protect themselves from the curse of oil price volatility
They do so using national wealth funds that build up when prices are high and run down when prices are low
Consuming countries have no such protection Strategic oil reserves only provide
short-term protection against physical supply interruptions
They do little to mitigate price volatility
A Norwegian Oil Platform Under ConstructionPhoto source” Ranveig http://commons.wikimedia.org/wiki/File:Oil_platform_Norway_new.jpg
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
How a Price-Smoothing Oil Tax Would Work
A price-smoothing oil tax could reduce swings in oil prices for consuming countries
Such a tax would begin by setting a floor oil price X
When the world price P falls below X, a tax of P-X would make up the difference
When the world price rises above X, the tax would be zero
Photo source: http://commons.wikimedia.org/wiki/File:Gas-pump-Indiana-USA.jpg
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
An Oil Tax would Enhance National Security
When world oil prices are high, money flows to many producers who are corrupt, undemocratic, or anti-American
An oil tax would insert a wedge between the US price and the world price
Pushing the US price higher would encourage conservation and investment in alternative energy
Pushing the world price lower would deprive hostile countries of revenue
Photo source:http://commons.wikimedia.org/wiki/File:Marines-with-sniper-rifle-2.jpg
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
An Oil Tax would Protect the Environment
High prices encourage investments in conservation and alternative energy, but there is a risk
If prices fall again, the investments might not pay off
By putting a lower limit on the price, a variable, price-smoothing oil tax would reduce the risk of green investment by consumers and businesses
Photo source: Massimo Caratinella http://commons.wikimedia.org/wiki/File:LosAngelesSmog.jpg
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
A Variable Oil Tax Could Help Protect Against Recession
Oil price spikes have often be followed by recessions in the United States
High oil prices reduce spending on other goods and services and undermine consumer confidence
A tax-smoothing oil price would help reduce the volatility of oil prices
Economist James Hamilton has written extensively on the effects of oil price shocks on the US economy. See his recent blog post on Econbrowser for some data and references
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
An Oil Tax Could Help Solve Deficit Problems
No one likes taxes, but given the large US budget deficit, some taxes are necessary. A variable, price-smoothing oil tax would raise revenue that could be used, in part, to reduce the deficit, and in part to lower tax rates on personal or corporate income taxes
Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
The Bottom Line
The bottom line: We do not have to accept the damage to
national security, the environment, and the economy caused by extreme oil price volatility
A variable, price-smoothing oil tax could mitigate extreme swings in oil prices and improve incentives for investment in conservation and alternative energy
The best time to introduce such a tax is now, when prices are already high
