causeandeffectworld.com Blog

Should oil be expensive?

Painful medicine, but some are arguing that we should keep the price of oil high by taxing it if the price per barrel falls below a certain floor – say USD 90 a barrel.

Things are so painful now, many economists say, because of the past two decades of cheap oil. Prices stayed low in part because they didn’t reflect the full cost of extras such as pollution, so there was little incentive to use energy more wisely. If those extras had been counted, the country would be better prepared for both today’s soaring prices and the day that global oil production begins to decline.

The other extra that isn’t included is the military and diplomatic cost of getting the product to market – those costs are paid via the federal income tax and are shared evenly by all, whether you only use solar or wind energy and bike to work.

Should we fund the military activities that have to do with petroleum (anything in the Middle East and Central Asia, for starters) via a petroleum sales tax, rather than via the income tax?  Wouldn’t this make alternative energy cheaper relative to petroleum and therefore spur innovation and investment?  Wouldn’t this create even more of an incentive to reduce the use of foreign oil?

The income tax would then be lowered to offset the increase in petroleum tax – this is a cost neutral proposal.  And since it is regressive – the lower your income, the greater the portion of it spent on necessities like transportation, we’d have to reduce the income tax for at lower incomes more than at higher incomes.

But, it seems to me that this will more accurately reflect the true cost of the product and therefore will help reduce our dependence on foreign oil – which will reduce the cost of the product in the long run.

So, let me know what you think?  Why is this a bad idea?