We need a floor price for oil

The good news is, oil prices tumbled below $125 a barrel on growing fears that high prices and the weak US economy are destroying demand. A weekly report by the Energy Department offered evidence that cash-strapped Americans are cutting back on fuel.

The bad news is, the excitement over alternative energy has also started to cool. According to a venture capitalist quoted by Businessweek, even if some experts see $200-per-barrel oil in their crystal balls, the mere fact that others predict $75 or lower is enough to deny financing for technologies that should make economic sense at $100 per barrel. 

Venture capitalist Vinod Khosla, a co-founder of Sun Microsystems (JAVA) and now a backer of alternative energy ventures, told Businessweek “we are getting the worst of both worlds—high prices and low investment.” That’s why, Businessweek reports, Khosla and many economists and energy experts are pushing the idea of a floor on the price of oil.

The logic of a floor price for oil is simple. The certainty of a relatively high price would stimulate enough investment in alternatives, efficiency, and new supplies to keep future prices from rising much above that level, Khosla argues. It adds no new pain, since the tax would start only after consumers and companies have already gotten considerable relief from today’s prices.

It would have been better to tax oil consumers decades ago, as some European countries did, to force people to become more energy-conscious and spur innovation. But our leaders took the path of least political resistance, so here we are in our never ending agony over the price of oil.

But since recent events have now accomplished the same thing, Businessweek says some economists say a floor is a good second-best. It is conceded that expensive oil hurts, but there’s a business case to be made for a floor under the price of crude.

The Businessweek article argues that “expensive energy, in many ways, is good. Why? When the price of oil goes up, people will use less, find substitutes, and develop new supplies. Those effects are just basic economics. Things are so painful now, many economists say, because of the past two decades of cheap oil.”

Businessweek asserts that “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 world would be better prepared for both today’s soaring prices and the day when global oil production begins to decline.

How would a policy that uses taxes to put a floor under the price of oil work?

Above a certain level—say $90—there would be no tax. But if the world market price dropped below that, taxes would kick in to make users pay the target amount.

“Expensive energy is a powerful medicine,” Businessweek points out. “It may hurt when taken, but it brings long-term cures for a host of ills. It compels companies and people to put fewer miles on the car, ditch the SUV, or install more efficient heating.” The magazine even cites a study from Washington University in St. Louis that links the rise in obesity since the 1980s to low gas prices, because it “led to less walking and biking and more restaurant meals.”

As the article puts it, “high energy prices also water the flowers of innovation, making investments in alternatives pay off and juicing the search for more oil. Military-funded researchers have made jet fuel from plants. Toyota and General Motors are testing plug-in hybrid cars that can run 40 miles on electricity alone. Companies are building vast expanses of mirrors in the desert to make steam, and thus electricity, from the sun. There are new systems to control power consumption by homes and businesses from afar and programs to insulate inner-city houses, providing energy savings — and jobs.”

Actually we have seen it all before. As Businessweek recalls it, “the myth of unlimited energy took a tumble as oil prices soared. By 1980, crude had jumped to $103 per barrel (in today’s dollars). The country responded, buying smaller cars, passing stricter fuel economy standards, making industry more efficient, and boosting oil exploration and drilling. Americans learned to use half as much energy per dollar of gross domestic product as they did before the crisis — gains that have paid off handsomely.”

But, the US and other countries including ours abandoned “all the heavy lifting we did in the 1980s” to reduce reliance on volatile oil and this has made us more vulnerable to the energy shocks today. Those early efforts to find alternatives to oil in the 80s resulted in a substantial reduction in demand… enough to make the world awash in oil, causing prices to fall.

The Saudis slashed production from 9.9 million barrels per day in 1980 to 3.4 million in 1985—and still weren’t able to keep the price per barrel from plunging below $11 in 1986 (the equivalent of $22 today). And oil prices stayed relatively low for the next two decades with predictable results we are experiencing today. We get fired up about doing something when oil prices are high, then when prices drop, we forget about it.

Just as the low oil prices of the late 1980s and ’90s caused some positive effects of expensive oil to unravel, Businessweek warned, the mere possibility that prices could fall is weakening the market forces pushing toward greater energy efficiency. “What really drives behavior is not the actual price, but the perception of where costs will be over the long term.”

The magazine also recognized a problem we also face here with Ate Glue’s administration. “Another danger is that Uncle Sam would fritter away the new revenue. Some economists suggest using the money to invest in oil alternatives, while others would return it to people in, say, lower income taxes.”

Perhaps, we can use a good part of that Katas ng Oil VAT to expand our public transport system not just in Metro Manila but in key population centers. Money from this tax can also be used to help make our rural communities more energy independent. Their energy needs are not that great and we have determined from past studies that most of those can be provided from resources available in the farms.

Again, as Businessweek pointed out, it’s basic economics: Use taxes to keep prices high for something we want to use less of — oil — and use the money to reduce the cost of things we want more of — growth and productivity. It cited the approach made by a Canadian province that could be replicated.

British Columbia has shown that it’s politically possible, too. On July 1, it added a small tax on gasoline designed to account for the costs of carbon dioxide emissions. The revenue will be returned in reduced income and business taxes. To ease the initial sting, the government sent each citizen a check for $100 at the end of June—a move that will help lower-income people who are struggling with higher energy prices.

Taxing energy, and returning the money to people in other ways, “is pretty much an economist’s dream,” Ian Perry, senior fellow at Resources for the Future, a Washington think tank, told Businessweek. No one discounts the pain of high energy costs. But it can also bring real gains. Energy costs ought to be used as an economic engine driving our effort to wean ourselves from petroleum before it totally runs out.

Live forever

Dr. Ernie E. forwarded a list of 100 tips to help you live forever based on scientific studies. Here are the first two.

Grill a steak. You may think it’s bad for your heart, but you’d be wrong. Beef contains immunity-boosting selenium as well as homocysteine-lowering B vitamins. And up to 50 percent of the fat is the heart-healthy monounsaturated variety.

Run indoors on hazy days. Researchers in Finland found that exercising outside on hot, hazy days when air pollution is at its worst can cut the supply of oxygen in the blood, making it more likely to clot. Do what I do and walk briskly in MegaMall or Mall of Asia for an hour.

Boo Chanco’s e-mail address is [email protected]