Oil And Its Externalities

Economist.com | The future of energy
I’m all for pushing the cost of negative externalities — usually pollution, but not limited to that — onto the ones producing them. The issue is oil and the externalities are not limited to pollution: they call the war in Iraq and the OPEC cartel negative externalities of our oil use.

The Economist supported the war in Iraq saying, among other things, that, while Saddam is not the worst state sponsor of terrorism, we had to start somewhere. They’re clearly not in the “no blood for oil” camp. Even so, they are hoping that technology will make the Middle East of little importance to us commercially and make any future wars there unnecessary.

Regarding the OPEC cartel, we’re informed that the West has paid in excess of $7 trillion above a market-clearing rate for oil due to OPEC and its machinations. I believe it and would love to see OPEC fall apart, and it has in de facto fashion on several occasions.

Their solution to the cost of the negative externalities is to ween the West from oil by using a revenue-neutral gasoline tax. In other words, to avoid the political problems of a tax increase, it would be accompanied by a decrease in some other tax. I like the revenue-neutral aspect of the proposal, but I’m not so sure it’s the best way to push the cost of the externalities back on consumers and producers.

We already have technologies available that can make cars virtually pollution free if low-sulfur gasoline is used. Adding these technologies will add to the cost of the cars and will almost eliminate the pollution. That appears to me to be the best way of getting cleaner air as well as pushing the cost onto consumers and producers.

Regarding OPEC, having Iraq pumping oil again will hopefully offset some of the cost of the OPEC cartel. We should maintain some influence over Iraq and can push for more production when needed and they have the second largest oil reserves in the world, after Saudi Arabia.

I’m not too keen on this gas tax idea. Making it revenue neutral gets rid of one of my major concerns — demand for gas is relatively inelastic, meaning a substantial increase would be needed before the consumption of gas declined. That’s why big-government types like this kind of tax — it raises gobs of revenue and they can claim to be on the side of the environment all the while fleecing taxpayers.

My other concern is that we should be agnostic with regard to energy, once all costs have been taken into account. Taxing gasoline is picking a winner other than gas when gas might be the winner in a more neutral situation. For instance, even when the cost of all negative externalities have been accounted for it may still be the most economical option available.

The article is thought-provoking and you should read the whole thing.

Such changes will not occur overnight. It will take a decade or two before either fuel cells or bioethanol make a significant dent in the oil economy. Still, they represent the first serious challenges to petrol in a century. If hydrogen were made from renewable energy (or if the carbon dioxide generated by making it from fossil fuels were sequestered underground), then the cars and power plants of the future would release no local pollution or greenhouse gases. Because bioethanol is made from plants, it merely “borrows” its carbon from the atmosphere, so cannot add to global warming. What is more, because hydrogen can be made in a geographically distributed fashion, by any producer anywhere, no OPEC cartel or would-be successor to it could ever manipulate the supplies or the price. There need never be another war over energy.

It all sounds very fine. What then is the best way to speed things up? Unfortunately, not through the approach currently advocated by President George Bush and America’s Congress, which this week has been haggling over a new energy bill. America’s leaders are still concerning themselves almost exclusively with increasing the supply of oil, rather than with curbing the demand for it while increasing the supply of alternatives. Some encouragement for new technologies is proposed, but it will have little effect: bigger subsidies for research are unlikely to spur innovation in industries with hundreds of billions of dollars in fossil-fuel assets. The best way to curb the demand for oil and promote innovation in oil alternatives is to tell the world’s energy markets that the “externalities” of oil consumption—security considerations and environmental issues alike—really will influence policy from now on. And the way to do that is to impose a gradually rising gasoline tax.

By introducing a small but steadily rising tax on petrol, America would do far more to encourage innovation and improve energy security than all the drilling in Alaska’s wilderness. Crucially, this need not be, and should not be, a matter of raising taxes in the aggregate. The proceeds from a gasoline tax ought to be used to finance cuts in other taxes—this, surely, is the way to present them to a sceptical electorate.

Judging by the debate going on in Washington, a policy of this kind is a distant prospect. That is a great shame. Still, the pace of innovation already under way means that Sheikh Yamani’s erstwhile colleagues in the oil cartel might themselves be wise to invest some of their money in the alternatives. One day, these new energy technologies will toss the OPEC cartel in the dustbin of history. It cannot happen soon enough.

I agree with that last sentiment. I’m just not sure a gas tax is the way to go.

No comments yet.

Leave a Comment