Sunday, June 22, 2008

The Tax and Subsidy Solution to the Global Oil Crisis.

Negative factors of oil price rises.

• Increased production costs for goods and...
• Increased transportation costs for goods, resulting in...
• Across the board inflation.
• Decrease in travel expenditures followed by airline bankruptcies.
• Automobile industry struggles, particularly SUV’s and mid size cars.
• Huge cash inflows to unstable, unfriendly regimes.
• Worsening trade deficit for USA.
• Global economic recession fears.

Positive factors of oil price rises.

• Increased attraction in renewable energy investment.
• Increased sales of fuel efficient cars.

Solution – A global tax and subsidy program, particularly involving North America and Asia. (Europe already has high taxes on oil).
In this program, taxes would increase by 15% per month for a year. The tax revenues in turn would help subsidize programs that lower oil consumption.

Right now, governments, particularly in China, India, and the US, are under pressure to do the exact opposite, decrease taxes, and even go so far as to subsidize fuel. This in turn increases demand, inflating prices further.

If these governments got together and made a concerted effort to artificially increase the actual price of oil through taxes, what we’d see is a decrease in demand, followed by a decrease in price.

Therefore, a worldwide 15% increase in taxes would see a decrease in demand, followed by a decrease in actual price per barrel of 5-10%.

The consumer would end up paying only a little more for fuel than before, not the full 15%.

The Results.

• Increased tax revenues for governments
• Decreased oil revenues for unstable governments
• A slight increase in fuel prices for the consumer

Now, why stop at 15% taxation. Why not increase that to 30%, then 45%, and all the way to 200%.

At 200%, the price of oil could drop to $50-80 per barrel. So with 200% taxes, the consumer is paying $150-240 per barrel, which is only slightly more than the $140 (and rising) that we pay currently.

The medium and long term difference would be that the revenues go to government, not to ridiculously rich countries.

With the big taxes, major oil consuming governments would be flush with cash. Billions and billions that they didn’t have before. This, in turn, can be invested in fuel efficiency by doing the following...

• Subsidize hybrid and electric vehicles.
• Offer tax incentives to car companies to manufacture locally.
• Subsidize and invest in alternative transportation (trains, planes, boats).
• Invest in carbon capture programs.

The above result in.

• Jobs are created.
• Economy booms.
• Exports increase.
• Fuel efficient push decrease oil demand.
• Oil prices decrease further.
• Cleaner environment.

The people who have the power to change things are our governments. In the short term, the consumer is stung, but in the long term we benefit greatly from competent taxation and energy management by our governments.

Challenges to overcome for this model to work.

• International governmental cooperation and coordination.
• US oil lobby interference.
• OPEC screwing with global supply to keep prices high.
• Election promises of low gas taxes or subsidies in return for votes.
• Frustration with short term gas hikes.

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