by Raymond C. Scheppach
05-10-05
There is a growing consensus that the United States and the world face an
increasing problem with respect to both the price and the availability of
energy, particularly oil and natural gas. However, that consensus breaks down
quickly when we consider the appropriate US public policy response.
Many advocate stimulating additional supply by reducing environmental
regulations, opening up the Arctic National Wildlife Refuge to drilling and
offering tax incentives for additional domestic oil and gas production. An
alternative school of thought supports demand reductions through tough mileage
standards and financial incentives for conservation. A third approach suggests
the federal government invest in a massive research and development program to
develop alternative fuels.
In reality, it is not necessary to choose between these strategies because
they are complementary, and we need all of them to reduce our dependence on oil
imports. The risks to the US domestic economyof a “do-nothing” strategy are
significant because of our high dependence on oil imports and the fact that the
oil-exporting countries are concentrated in the Middle East, which continues to
be a politically unstable part of the world.
This is to say nothing about the major US balance-of-payment problem, which is
exacerbated by our oil dependence, and the fact that there is now a huge
reallocation of wealth from oil-importing to oil-exporting countries.
One approach that would encompass all three strategies would be to enact a
fluctuating tax on oil imports that not only sets the price of oil imports at a
level that includes a “risk premium,” but also maintains that level over several
years to stabilize the marketplace. For example, if it is assumed the long-run
price of oil should be $ 80 per barrel, and the current price is $ 63, then
there would be a tax on oil imports of $ 17 per barrel. If the price of oil
imports went to $ 59 per barrel the tax would increase to $ 21. Similarly, the
tax would go down if the price of imports went up.
The volatility in the price of oil has historically been a major impediment to
investment. While the higher oil price is important, the most critical component
is the long-run price stability that creates the certainty in the marketplace to
stimulate private investment.
A policy relying on the fluctuating tax would have the following impacts:
-- The domestic price of oil would increase to the price of imports, including
the tax in the above example, which would generate increased domestic profits
for further investment and enhanced oil production. Other fuels such as natural
gas and coal would increase proportionately, further stimulating production.
-- The higher, stable oil price would force the automobile industry to produce
more fuel-efficient cars and stimulate other conservation, such as car pooling
and even retrofitting of houses with more insulation.
-- The certainty with respect to oil prices also would stimulate private-sector
investment in alternative fuels.
Such an approach would be easy to administer as the number of oil importers
is limited, and they are easy to track. Furthermore, it would minimize the need
to regulate industries and would not require investment in alternative fuels by
either the federal or state governments. Essentially, this policy would depend
on the market to create the appropriate incentives, and in time, it also would
eventually lower the long-run price of oil.
Some of the revenues from this tax would be placed in the Highway Trust Fund
since the gasoline tax revenues no longer are sufficient to even pay for the
outlays authorized in the most recent highway bill. A special set-aside could be
created within the trust for rehabilitation and reconstruction efforts in
Alabama, Louisiana, Mississippi and Texas.
Finally, some of the funds could be utilized to create an emergency storage
for refined products, i.e., gasoline, jet fuel and home heating oil. This
additional capacity would be developed privately, but paid from the revenues of
the oil import tax.
This approach is good energy policy and would effectively fund both the
short-run rebuilding effort in the four states affected by the recent
hurricanes, as well as the long-run infrastructure needs of all states.
Raymond C. Scheppach, Ph.D., is the executive director of the National Governors
Association. The views expressed here are those of the author and do not
necessarily represent those of the National Governors Association.
Source: Stateline.org