Comments Will Candler has made

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

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

Cannot Get There From Here

We have to thank Senator Boxer for working so diligently to improve Warner-Lieberman.

That said the sad truth is "We cannot get there from here".  All those billions of subsidies to "ease the pain of Uncle Tom Cobley and All", are "revenue neutral".  How come? Well the billions are to be generated by auctioning allowances.  The cost of these allowances will, of course, be passed on to the consumer:  So the billions of subsidies represent billions of unnecessary pain for consumers. Unnecessary?  Yes, because the billions could be returned to consumers as equal per capita monthly energy dividends or rebates.  (See www.carbontax.org or www.capanddividend.org or my book "Global Warming: The Answer.  (The Energy Dividend)").

Another equally sad truth is that Warner-Lieberman is a decade (or two decades) too late. The Bill aims to reduce emissions below 81% of their 2005 level by 2020, and to 29% of this level by 2050. Total US emissions to 2050 are expected to be more than 33% of what they would have been without the Bill.  This is just not enough reduction (see for instance
http://gristmill.grist.org/story/2008/5/18/14359/9757 and
http://gristmill.grist.org/story/2008/3/19/13140/3196).  

The simple facts of global warming are:
*    Global warming is real
*    It is caused by human use of fossil fuels
*    We need to stop using fossil fuels.

There is no way (Barbara Boxers best efforts notwithstanding) to amend Warner-Lieberman to ensure that we cease to use fossil fuels, and as quickly as possible.

"To get there from here" we need something like a $250 a ton of carbon fee or tax that would approximately double the cost of coal based electricity, and yield revenue of about $420 billion a year. This would be sufficient to pay a monthly rebate or dividend of $240 per registered voter (dropping to $166 a month when all voters registered). The tax/fee should be collected at the mine, well-head or port of entry, and should be supported by a tariff on energy intensive imports (steel, aluminum, ceramics, cement, etc) that had not already paid a carbon fee. This program is described at greater length in the above book, available from Amazon, or
http://www.powells.com/biblio/61-9781434345080-1  of as a free pdf file on request from wcandler1@comcast.net.

Will Candler