Will Candler
The Basics
- Name: Will Candler
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Part I
- To focus on gasoline rather misses the point, we should be discouraging the use of all fossil fuels. However Friedman and the article focus on gasoline, so be it.
- Basically we are up against Peak Oil, world output is not expanding, or certainly not expanding as fast as non-US demand is expanding (principally in the producing countries, China and India), so that for all practical purposes the US faces a vertical supply function, price is then determined by where US demand cuts this fixed (and leftward moving) supply. Price will rise to the point where demand drops to the supply available.
- With this analysis and $4.00 gasoline at the pump, it makes no difference to the cost to motorists if the whole $4.00 goes to the oil companies, or $2.00 as taxes leaving $2.00 for the oil companies.
Will Candler
On Behavioral quirks make taxes a tough sell posted 1 year, 5 months ago 4 Responses- To focus on gasoline rather misses the point, we should be discouraging the use of all fossil fuels. However Friedman and the article focus on gasoline, so be it.
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Part II
4. Suppose an additional $4.00 tax was imposed right now, then we would see:
* Price at the pump rise to $8.00 (as in Europe),
* Wild indignation and complaints from motorists, lots of ill-advised activity in Congress,
* Very rapid abandonment of SUVs, shift to hybrid cars (even at $4.00 there is a back log), much greater use of public transport, reduced holiday driving, less air travel, and a resulting cut back in gasoline use.
* Pump prices falling back to say $6.00 ($2.00 to oil companies, and $4.00 in tax) as reduced demand led companies to cut prices so as to sell their available supply.
Will Candler
On Behavioral quirks make taxes a tough sell posted 1 year, 5 months ago 4 ResponsesClick here to view comment in original post
Part III
- Such a tax would yield about $1.5 billion/day (20.6 million barrels day by 42 gallons per barrel by $4), and could be returned as a monthly rebate/dividend of $390 per tax payer ($ 1,500 million dollars by 30 days divided by 115 million tax-payers). This figure may appear "too high" but remember taxes from truckers would be returned to tax-payers to help cope with higher costs due to higher transportation charges. It is too high to the extent that people cut back on the use of gasoline. (People would also quickly stop joint returns, so the rebate would fall).
- A problem with Friedman's floor price is that it gives producers no reason to cut prices below the floor. If the floor was set at $8.00 a gallon, the oil companies would just cut-back production to enjoy the full $8.00 price.
- $8.00 a gallon? We will be there in three years at the present rate! Might as well put on the tax, and enjoy the rebate.
Will Candler
On Behavioral quirks make taxes a tough sell posted 1 year, 5 months ago 4 Responses- Such a tax would yield about $1.5 billion/day (20.6 million barrels day by 42 gallons per barrel by $4), and could be returned as a monthly rebate/dividend of $390 per tax payer ($ 1,500 million dollars by 30 days divided by 115 million tax-payers). This figure may appear "too high" but remember taxes from truckers would be returned to tax-payers to help cope with higher costs due to higher transportation charges. It is too high to the extent that people cut back on the use of gasoline. (People would also quickly stop joint returns, so the rebate would fall).
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How High Can Oil Go?
How High Can Oil Go? Well, at the pump it can easily go to $8 or $10 a gallon. Europeans have been paying $8 a gallon for decades. The difference is that most of their high price has been tax, that helps explain how they can afford universal health care and good state schools.
The basic problem is that increasing demand (for economists, a global demand function shifting to the right) is running up against essentially fixed demand (for economists, a fixed and almost vertical supply function).
As Joseph Romm points out (Salon "Peak Oil? Consider it Solved"): "Last year, consumption was 86 million barrels a day, up from 78 million in 2002, roughly a 2 percent annual rise. Where is all the demand coming from? Hint: It's not just the rapidly developing countries. From 1995 to 2004, China's annual imports grew by 2.8 million barrels a day. Ours grew 3.9 million. China now sucks up about 6 percent of all global oil exports. We demand 25 percent. American's trade deficit in oil alone is nearing $500 billion a year." That is U.S. demand grew slightly slower than world demand or about 1.6% a year, while China grew much faster, or about 4.5% a year.
Charles Komanoff at www.Carbontax.org has estimated the long-run U.S. price elasticity to be -0.4. That is a 1% rise in price (over the long term) result in a 0.4% decline in U.S. consumption. No need to take any of the above numbers too seriously, but they give us an indication as to where prices may be going. If we want U.S. demand to hold constant, when absent a price change it would increase by 1.6%, we need a 4% price rise (1.6/0.4). Using this figure if we have $4.00 gas in 2008, we would need (only) $4.16 gas in 2009 to hold American demand constant.
However, this is much too optimistic a picture. The estimated elasticity of -0.4 is for a long-run elasticity, when people have had time to replace SUV's with more fuel efficient cars, to take public transport, move closer to their work, reduce air-travel and the like. Interestingly Komanoff also estimated short-run price elasticities, and observe that these seem to be rising: "Gasoline's short-run price-elasticity is rising. After a low of -0.04 in 2004, the short-run price-elasticity increased to -0.08 in 2005, -0.12 in 2006 and -0.16 in 2007." That is, people are becoming more sensitive to gas prices, and adjusting their behavior, even in the short-run in response to price changes. If short-run (year to year) price elasticity was even -0.12, we would require a 13.3% price rise (1.6/0.12) to keep demand constant in the short run, to say $4.50 gas in 2009.
Even that is not the end of the story. What about the Chinese? In order for them to hold consumption constant, with the demand function moving right 4.5% a year, and even a short-run elasticity of -0.12 they would require a 37.5% price rise (4.5/0.12) to keep demand constant, that is they would be paying $5.50 for gas in 2009, if they were paying $4.00 in 2008. And a $2.00 rise to $7.50 in 2010, and so on.
These are only "back of the envelope" calculations, but they do show the implications of three realistic assumptions:
* World demand for oil is growing faster than production,
* Chinese (Asian) demand for oil is growing faster that American (or developed world) demand, and
* Elasticity of demand for oil is inelastic, and in the short term, highly inelastic.If a price rise to $4.50 a gallon would hold American demand in check, but a rise to $5.50 is needed to keep Chinese demand in check, we can bet that a simple market solution would lead to a intermediate price (say $5.00 a gallon) with American consumption declining slightly in order than Chinese consumption could expand slightly.
Now we come to the tricky bit. If the above is unclear, it is going to get worse, so by all means go back and see if I have made a mistake.
The above has argued that:
* A reasonable (albeit back of the envelope) calculation suggests that a price of about $5.00 might be needed to limit demand in American and China to the available supply, and
* At least in the short-run, supply cannot be increased.That means that supply is not affected (in the short run at least) by price. Given a $5.00 price at the pump, supply will be the same regardless of whether the whole $5.00 goes to the oil companies, and oil producers, or say $3.00 goes in taxes leaving $2.00 for the oil companies and producers. A $3.00 a gallon tax would produce enormous revenues, of about $2.6 billion a day, or just under $1 trillion a year. If we do not tax it away, this "excess revenue" will simply end up in the pockets of the oil companies and oil producers. If we do tax it away the trillion dollars a year would be available to reduce other taxes, pay-off the national debt, or be returned to citizens as an equal per capita rebate (unrelated to gas consumption). For more on this see www.capanddividend.org, or www.carbontax.org, or my book "Global Warming: The Answer. (The Energy Dividend)", available from Amazon, or
www.powells.com/biblio/61-9781434345080-1 or from me as a free pdf file, at wcandler1@comcast.net.In the body of the Joseph Romm's Salon article http://www.salon.com/news/feature/2008/03/28/peak_oil_sol ...
says: "I have never been a big fan of higher gasoline taxes, not just because they are a political non-starter, but also because you would have to jack up taxes an absurd amount to get the desired impact." It is perhaps unfair to pick on one throw-away comment in an otherwise very useful article. However, in the presence of "peak (limited supply of) oil" and expanding demand, taxes come out of the pockets of the big oil companies and oil producers and go into pockets of consumers, either as compensating reductions in other taxes or as a directly identifiable rebate or dividend. They would thus better be described as politically a "jump starter".Yes, of course, the argument gets a little more complex if America imposes a tax and China doesn't, but the Chinese are not stupid: They can see a free lunch at least as well as we can.
Will Candler
On But soon we will be mad for $6-7 gas posted 1 year, 5 months ago 6 ResponsesClick here to view comment in original post
Lorna Salzman is right!
Lorna Salzman is right!
In his latest slide show to TED, Al Gore finally got around to recommending that we "Put a Price on Carbon" for which he got a round of applause. But what, if anything does he have in mind?
Price? $2.50 a ton of carbon or $250.00*?
What? At the mine, well-head and port of entry*? At point of emission? At point of consumption (gas tank or utility bill)?
How? By caps given away for free? By caps auctioned? As a per ton tax of fee*?
Revenue? If permits not given away for free, what is to be done with the revenue? Used to promote fossil-free technologies? Used to reduce other taxes? Returned to citizens as a per capita rebate*?
Offsets? No*? Or yes?
* = my preferences, but what is ACP proposing?
Before asking for public support, ACP needs to tell us what they want us to support, or we will again find ourselves supporting an ill defined Warner-Lieberman.
My preferences are spelt out in "Global Warming: The Answer. (The Energy Dividend)" available from Amazon, available from Amazon, or
http://www.powells.com/biblio/61-9781434345080-1 or as a free pdf file on request from wcandler1@comcast.net.See also Peter Barnes "Who Owns the Sky?"
Will Candler
On Gore's Alliance for Climate Protection unveils ambitious $300 million ad campaign posted 1 year, 5 months ago 18 Responses