Wednesday, April 6, 2011

Is It time for a Significant Fuel Tax...?

In January 2009, Exxon-Mobil CEO Rex Tillerson gave a speech that, among other things, supported the idea of a carbon tax.  Has Rex suddenly "gotten religion" on this whole Anthropomorphic Global Warming? Hardly. Rex is a businessman, and he sees the train's headlights coming at him through the tunnel; he's just figured out that this is the lesser of the inevitable evils.

President Obama, at a town hall meeting, said that "...[gas prices are] going to still fluctuate until we can start making these broader changes [toward renewable energy], and that's going to take a couple of years to have serious effect...If you're complaining about the price of gas and you're only getting 8 miles a gallon, you know, you might want to think about a trade-in."

I also remember a Thomas Friedman op-ed piece some time in late ‘08, where good ole Tom was promoting the idea of a gasoline tax, something to keep the price of fuel at or above a specific price (can't find that article now; if you know where it is please post a link). Anyway, Tom was his consistent "we know better than you do" (and his typical flip-flopping between bad and terrible logic didn’t improve) but I recall he had a few good points in there, despite the incorrect-predictions-ness.

What does Rex, Obama and Tom know that we don't? Nothing.

In early 2009 I took a trip to Germany (and another one just this past month). As I wrote in my drivel on that trip, the types of cars that they drive "over there" are significantly different from ours here in the States. Their vehicles are usually diesel, in general significantly smaller, and are well-suited to a more-urban, more-local type of driving. On the other hand, it was common to see many of those small cars on the Autobahn, safely doing speeds of 80-90 mph. I liked a lot of those cars, and lamented that we could not get them here in the USA, presumably because the manufacturers think we don't want them. And, they’re probably right; the reason we probably don't want them is because we don't need them: gasoline is still relatively inexpensive here, whereas in Germany it’s almost twice ours at ~$8 per gallon. And why is that? It's not because oil and/or gasoline is more expensive there; we all buy the same stuff. It's more expensive because of the taxes tacked on by the various European governments

A couple of other things I noticed: there were many electricity-generating windmills in Germany. All over the place. I'm not talking small ones, either; I'm talking windmills with each blade the size of a tractor-trailer. And I'm talking "flocks" of a few dozen windmills each, with these "flocks" being seen every 10km or so. I don't think you can drive down the wide-open Autobahn on a clear day and not see windmills somewhere on the horizon (if not right over your head at a rest stop). The other noticeable thing is the number of homes with solar panels on them: if there was open southerly sky, the house had a PV or hot-water panel on it (in full disclosure, some of you may be aware, I installed a PV system on my house two January ago). All the money for this stuff had to come from somewhere, and I'll bet a dollar to a donut it came from the people, via subsidies from the German government (half of the money for my own PV system came via subsidies from the Feds and the State of Connecticut...)

Finally, let's consider what happened three summers ago, in 2008. For various reason (speculation, geopolitics, whatever), the price of oil shot up to nearly $150 per bbl, and retail gasoline shot up to well over $4/gallon. Americans did something (somewhat) surprising: we cut back on our use of gasoline. Yes, Americans actually did think about their personal use of the automobile, gave consideration to the type of vehicles they were driving and/or buying and how they were using them, and actually made thoughtful choices to improve their own positions in the whole cycle of petroleum usage. For the first time in a looooong, time, we actually used LESS fuel than we had in the same period the year before. We began to notice a reduction in the number of larger vehicles on the road and car dealers immediately noticed a change in the mix of the types of vehicles people were buying. The auto manufacturers that were prepared (smaller imports) won; those that relied on sales of large vehicles (hello, Detroit!) lost.

The petroleum market responded to this reduction in demand with a commensurate lowering in price. Unfortunately, speculation had so over-driven the prices of these commodities that the (unsurprising) crash was intense: by January 2009 the prices for oil and gasoline were roughly 1/3 the prices they were only ~6 months prior; hell we had retail gasoline back to $1.65 per gallon! As a result, basic macro-economics won again and we started to change our ways back to pre-2008, dusting off the SUVs and quickly forgetting the Summer of 2008.

In a March 2011 Fortune article, "Where's the Demand For Electric Cars?" the author agrees with this observation, saying, "Up until now, this has been the cycle: high gas prices bring talk of fuel efficiency and alternative energy-fueled vehicles -- talk that dies down the minute gas prices drop. Detroit then returns to making the sorts of gas-guzzling vehicles it's been churning out for decades." "This time though," he writes, "carmakers say things are different. They're not just offering underpowered econoboxes for sale. For the first time ever, a slew of hybrid and electric vehicles are at the ready."

Want to know how to be sure that something will be the same again? Just listen for someone to say, "hey, this time it's different." Yee-ah. When price of oil drops again (and it will, we've got a lot of this stuff right now, and finding more and more) what do you think Americans are going to do? Yup, we'll go right back again to the old habits. We gotta change.

Am I suddenly, after a couple trips to Europe and a couple of recent market price swings, implying we should become a member of the EU? Hardly. I am, however, looking at what we learned over the last few years, adding to that the idea that the socioeconomic attitudes from the current White House Administration are waaaay different than the attitudes before, and recognizing that if we want to enjoy the things we currently enjoy, then we better get off our duffs and find a way to compromise. Contrary to the current President's thoughts, government isn’t the "only" way to do it, but proper application of government "nudging" of market forces (yes, we’ll call it social engineering) can certainly direct us towards a better way.

Let’s face some realities:
  • Oil may not be "available" forever, but I believe there’s a s**tpot full of it out there if we're willing to go for it. But we will never run completely out of oil, ever. There will always be at least one barrel of oil sitting in the basement of some Ferrari owner's house, waiting for him to use his chemistry set to refine it for a track day. But that one barrel of oil would probably be worth billions, so he won’t use it. Therefore, the limiting factor long-term will not be availability, it will be price.
  • As long as the price of oil is depressed, no oil company is going to risk capital on new exploration. I don't believe "peak oil" is here, I believe the limiting factor there is how much we as consumers are willing to pay for it, and that price then decides whether someone wants to go after it or not.
  • As the supply of oil and gas decreases due to lack of exploration, price will increase, and energy substitutes become more attractive. As demand decreases, the price will drop, and the economic viability of going to the ends of the Earth to drill for oil will wane.
  • "AGM" ain't going away: it's a religion. Despite the East Anglia “-gates”, saying "they'll get over this whole Global Warming thing" is like the Romans saying "they'll get over this whole Christianity thing." Didn't work for them, won't work for us. So, no matter how much data you toss at the masses, we gotta decide how we're going to deal with it. Best for us to decide than let someone else do it.
  • We kicked that economy-destroying Kyoto Protocol can down the street (let's disregard the fact that it ain't working in Europe, either), but it’s not gone. And then there’s the whole Cap-n-Trade thing, and the EPA has pretty much been given carte-blanche control of our entire petroleum-based economy with the power to limit CO2 as a pollutant. It’s a given that we will be forced by various resulting regulations to reduce carbon output.
So, it's coming, folks, let's get ready for it. What can we do about it?

A lot of reasonable people (myself included) believe that society's full costs of the use of petroleum (e.g., environmental costs, carbon dioxide, AGM, geopolitics) are not fully expressed by its price; economists call that a "negative externality". As such, since the cost of this externality is not covered by the price then it's actually under-priced and we will, as a result, over-consume. If accept this premise, then the only way to cover this externality is with a higher price through taxation, and the use that tax revenue to pay for those costs. Coupled to the idea that we really do want, long-term at least, to reduce demand and encourage development of substitute technologies, the answer seems clear: we need to increase the retail price of fuels.

Now, don't get me wrong: I'm as laissez-faire/free market as they come. I believe that the real reason the price of oil is low is because there’s plenty of it out there, Peak Oil Cassandras notwithstanding. But, as described above, I believe the price is not really reflecting the whole cost of the product to society (as recently illustrated in the Gulf). So the “answer” is for us as society to increase the price to the individuals that use the product and then distribute that money toward the costs; the most common way to do that is through taxes.

However, the biggest problem I have with a tax idea is that it requires money to go to a government; in the case of this study we're talking Washington, DC. Does anyone -- left or right -- believe that any taxation revenue from a significant fuel tax will be used to alleviate these external costs, or to subsidize development of fuel alternatives, or for projects even remotely related to the use of petroleum? Or do you think that money will go down a General Revenue hole to be used for whatever Congress decides? I’d suggest at least the last couple of years have proven that this money will be diverted to the latest "issue of the day", pork, and generally increased overall government spending. If you think otherwise, well, please pull your head out of...uuumm, the sand...

Alternatively, the current administration has decided that either CAFE increases and/or a massive carbon-trading program is the way to go. “Fale”. First, CAFE will do nothing to affect the millions of gas-sucking cars and trucks already on the road, and could very well increase their attractiveness to the driving public; second, the carbon chits scheme will end up being yet another massive government program rife with corruption and back door deals. In the end not much will change except our pocketbooks.

So what to do? One idea is to place a minimum price on the cost of fuel, with a 100% tax placed on marginal revenue for each gallon sold below that minimum price. For the sake of argument, let's set a minimum price on gasoline at $4/gallon at the retail level; retailers would never sell gasoline below $4 because all marginal revenue below $4 would be paid to Da Gubmint (i.e., if you sell your fuel for $3.75/gal then you would owe DC $0.25 on each gallon you sell). There may be some competitive pressures to sell gasoline at as a "loss leader" to encourage other purchases, but for the most part gasoline will sell for $4 minimum, "encouraging" people to change their habits to become more fuel efficient long-term. We could even index this floor to inflation annually.

The advantage to this idea is that all consumers - especially those with older, dirtier, less-efficient vehicles - would be faced with a minimum price of fuel, thus encouraging them to reduce their consumption and eventually make lower-consumption alternatives (e.g., hybrid, electric, etc) a lot more attractive. And that would send a demand signal to auto manufacturers to provide more-fuel efficient vehicles. Further, no additional money would go to any government to be mis-allocated; the marginal revenue would go to the retailer, his wholesaler, and eventually back to the oil companies, who would be encouraged to search for more oil to increase supply to increase that fat profit margin.

But, this doesn't cover all those external costs, does it? Unfortunately, the only entity with the power to collect and pay for those external costs is a government. Yet we really cannot trust a government to, long-term, use those additional funds for their expressed purpose. The government, however, still has the power to "social engineer" the situation via increased taxes on the oil companies or - even better - force them to “invest” that marginal revenue in certain “in-kind” alternative energy projects such as solar, windmills, and toward "rebates" for specific types of car purchases; we could "incentivize" that behavior by letting them write off those "investments" 100% against profit. And, structured correctly, it may eventually be profitable for oil companies to invest even more money in renewables, giving them increased diversification, and a clear direction in the future as we wean ourselves of oil.

So with this oddball idea we:
  • Address demand through higher prices, thus encouraging reduced use, which would;
  • Give incentive to auto manufacturers to provide more fuel-efficient automobiles (without massive subsidies), and;
  • Address increased supply through increased revenues to the oil companies, encouraging additional exploration to cover us while we;
  • Address further development of alternatives via subsidies to the oil companies, and;
  • Gradually further increase the price of oil products as the alternatives become more available at lowering prices, with the goal of:
  • Gradually moving toward alternate energy sources for transportation.
Most importantly, as we reduce the use of petroleum products as a transportation fuel through increased retail price, the costs of the myriad of products manufactured from petroleum would not be affected (and may even drop, given the increased margins from gasoline refinery sales). The oil we're no longer using for transportation can now be used for these products.

The whole macro-economics of the thing would be an interesting study.

Yeah, it's an oddball idea, and I ain’t got no steenkin’ details worked. But I am sure of one thing: if we’re going to tackle this issue long-term it must come from the demand side: we must find ways to encourage people to use less gasoline. The easiest way to do that is price. Doing so will have numerous positive results and can go a long way towards stopping other, more onerous possibilities from seeing the light of day…And, we gotta do something, or it will be done for us, and I'm certain we won’t like what “they” figure out...


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