Saturday, October 18, 2008

Axis of Diesel: Falling oil prices good?

After reaching a high of $147 a barrel, oil prices have plunged in recent days in response to worsening economic indicators all over the world. And more so in the largest oil consuming economy--the US. It has fallen through the $70 level. The good thing is if this continues, Venezuela will be bankrupted and Hugo Chavez will be in huge trouble :-)

Ok, seriously, could this plunge resemble the kind of price drops that followed the peaks reached in the early 1980s? OPEC is worried about this and has called an emergency meeting to stablize prices in the 70-90 dollars price range. The Times has aptly referred to all this as the Axis of Diesel--the Brits are funny with their headlines :-)

Writing in the NY Times Magazine, Roger Lowenstein argues that we ought not be too thrilled with falling oil prices because it might just about take away the incentive to explore alternatives to oil. He notes there:
You can argue that last July’s $147 peak was irrational, but Aubrey McClendon, the chief executive of the Oklahoma-based Chesapeake Energy, says it was merely the answer to a real-world economics quiz: at what price would the world consume less oil? Americans began to cut back on their driving at $50 oil, and at something like $120 oil they garaged their S.U.V.’s en masse. People in many emerging nations were slower to react, because their governments subsidize local gasoline prices. But as the price rose, such a subsidy became costly, and beginning in May, China, India, Indonesia and others cut their subsidies. The upper bound had been reached.

Lowenstein concludes his essay with a forceful argument that if the price falls below $70, which it has, then we ought to have a comparable tax on oil. Good luck on that, Lowenstein--we lost that opportunity back in 2001 soon after the 9/11 attack--Americans would have gladly put up with that tax as a patriotic duty. The president lost that opportunity. In fact, he beckoned us to continue on with our shopping! Not now when the economy is tanking, when people are losing homes and jobs.
What the country doesn’t want is to remain dependent only on oil — to lose the urgency to develop alternatives. It happened once before. After the gas lines of the ’70s, Jimmy Carter declared that solving our energy problems was the moral equivalent of war. Then, in the 1980s, Americans forgot.
The way to avoid a repeat is to dust off an idea that Gerald Ford once proposed: a tax on oil. Ideally, it would kick in only if the price fell back to, say, $70 a barrel. The beauty of this tax is that, very likely, no one would have to pay it. The tax would merely serve as a floor — a new lower bound. Auto companies would never have to worry that cheap gas would tempt consumers away from efficient cars; investors could finance development of batteries and fuel cells, because cheap oil could never undercut them. Oil itself would be used more sparingly and last longer. The oil market did its part when it sent the price to almost $150. The government should make sure there is no going back.

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