Recently, when asked about burdening high gas prices, candidate Obama opined that he “would have preferred a more gradual progression (to high gas prices)”. His bluntness and candor – while probably unintended – was quite revealing. In fact, he may have provided a defining clue regarding his core – but politically vulnerable — oil policy.
First, at the extreme, progressive conservationists would like to end the use of all fossil fuels (i.e. coal and oil) since their extraction scars the earth, and their emissions threaten to warm the planet. Beneath the hysteria, the zealots’ concerns are deep-rooted and, most likely, are directionally correct.
Most economists would probably agree that the “pure play” to ending the use of carbon-based fuels would be to “internalize their external costs” by taxing them. That is, for example, to institute a high federal gas tax at the pump – pushing consumers’ prices to a painfully high enough level that demand for gas falls (i.e. significant conservation takes hold) and alternatives become economically more attractive (e.g. biofuels and hybrid cars).
But, political populists don’t want to impose lifestyle changes or economic hardships on hard working middle class citizens – or, at least, they don’t want to seem like they’re doing so. A high federal gas tax at the pump would be a conspicuous lightning rod that would be politically suicidal for any candidate.
So, the reconciling question for populist conservationists is “how to get pump prices up enough to cause a shift out of gasoline without appearing to hurt the working class economically and getting punished politically?”
As Sherlock Holmes would say, “simple, Watson”. Simply leverage classical economic market forces. How? (1) By constraining the supply of oil (and gasoline) to force prices to rise, (2) By putting more money into buyers’ hands to turboboost the price trajectory, and (3) By denying purposeful complicity and blaming convenient fall guys for the sorry state of affairs.
Constraining supply is the easiest part: outcast the problematic foreign oil sources (i.e. OPEC), alienate Mexico and Canada (our friendly sources) by reopening NAFTA, logjam any high potential domestic exploration (deep-sea, ANWR, mountain shale), and continue to outlaw expansion of gasoline refinery capacity. The latter is particularly important since refineries are the “choke point” in the gasoline supply system. As long as refinery output is kept in check, the excess market demand will eventually push gas prices up. It’s basic economics.
How can these natural economic forces – which some believers may consider too slow — be turbocharged? Also easy. First, let the exchange value of the U.S. dollar fall so that it takes more dollars to buy a barrel of oil (or anything else). Then, let unsupervised financial speculators throw their stockpiled cash into the oil market, bidding up the price of oil futures contracts.
And if that isn’t enough, move to mitigate the imposed economic burden on consumers by providing some personal “budgetary relief” via tax breaks – say, $1,000 per person to cover the increasing price of gas. Said differently, give people more money so that they can bid up the prices even faster. A masterful tactic since a grateful citizenry will embrace an altruistic government stepping in to ease their economic pain, never suspecting that they are important pawns in a clever plot to push prices even higher.
And how can this “budgetary relief” be funded? Easy. Close the loop by taxing the apparent windfall profits of the price-gouging oil companies. Specifically, candidate Obama promised, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.”
Another great play since political credit can be claimed for a tax neutral program that punishes a group of notorious corporate villains, using their ill-gotten and undeserved gains to provide middle class budget relief. Bingo! A certain shield of deniability (for the higher gas prices), and — with a little luck – probable coronation as a savior.
Rather than going through these multilevel shenanigans and obfuscations, wouldn’t it just be easier to put a federal tax on gas at the pump?
I guess that would be too obvious to folks.
KE Homa
6-19-08
The Homa Files 