Fuel price floors and funds for the future

2008-11-23

in Economics, Politics, The environment

While prices send important signals about availability and marginal cost, volatility in fuel prices can be quite problematic. It impedes effective planning, causes abrupt swings in capital and wealth allocation, and sometimes leaves people hoping for future low prices, rather than investing in efficiency now. At the same time, there is an issue of inter-generational equity when it comes to fossil fuels. They are marvellous things: portable, packed with energy, and thus far relatively cheap and easy to extract. Recent generations have benefitted handsomely for their use (though future generations may suffer even more from the consequences of the emissions). A case can be made that some fossil fuel use has served to benefit future generations, because it has helped create the conditions for their material prosperity. Other uses are unambiguously selfish. The difference is akin to that between borrowing to invest and borrowing to finance consumption.

There does seem to be a fairly straightforward mechanism through which both of these problems can be made more manageable. The government could put a floor on fuel prices: pocketing any difference between the market price and the sale price as revenues. Those could then be invested in a fund that will pay out annual dividends to future generations. This would be akin to the oil-funded pension system that has been established in Norway. In this way, members of future generations will at least profit in some proportion of this generation’s fossil fuel wealth. It would also simplify planning for all those who use fuels, since they would be certain of paying at least a pre-set amount at any point in the future.

This isn’t an approach that the world as a whole could take, or even any major players in it. If the government set a floor price of $2 for a litre of gasoline, gas suppliers could just expand their prices to that point and eliminate any payments to government. Since Canada isn’t large enough to substantially affect the international price of oil, however, there may be scope to tax the difference between the floor price and the international price for an equivalent amount of crude oil / coal / etc.

No doubt, this system would cause some economic and equity-related problems I haven’t anticipated. That being said, it is perhaps an example of the general kind of approach that governments should be considering.

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{ 7 comments… read them below or add one }

R.K. November 24, 2008 at 12:04 am

Imagine if we were all getting pensions as compensation for resource booms in the past: say, the Klondike gold rush and the hunting to near-extinction of the buffalo.

. December 11, 2008 at 2:26 pm

The Case for Higher Gas Taxes
R-Squared Energy Blog
December 11, 2008

. December 31, 2008 at 12:55 pm

The Net-Zero Gas Tax
A once-in-a-generation chance.
by Charles Krauthammer
01/05/2009, Volume 014, Issue 16

“So why even think about it? Because the virtues of a gas tax remain what they have always been. A tax that suppresses U.S. gas consumption can have a major effect on reducing world oil prices. And the benefits of low world oil prices are obvious: They put tremendous pressure on OPEC, as evidenced by its disarray during the current collapse; they deal serious economic damage to energy-exporting geopolitical adversaries such as Russia, Venezuela, and Iran; and they reduce the enormous U.S. imbalance of oil trade which last year alone diverted a quarter of $1 trillion abroad. Furthermore, a reduction in U.S. demand alters the balance of power between producer and consumer, making us less dependent on oil exporters. It begins weaning us off foreign oil, and, if combined with nuclear power and renewed U.S. oil and gas drilling, puts us on the road to energy independence.”

. March 11, 2009 at 2:42 pm

To correct the market’s chronic failure to price oil efficiently, governments of oil-importing nations should fix the price in internal markets using a simple policy tool: an excise tax on oil imports equal to the difference between a target price that each government would choose and the prevailing world market price. Where imports are the marginal source of supply to a market, the price of imports sets the price for all production and consumption within that market. The oil excise tax will therefore fix a floor price for oil, and guarantee that producers and consumers in the internal market will never face a price less than that floor price. The stable pricing environment that results will enable the rational decision-making that the market fails to provide when left to its own devices.

. September 25, 2009 at 2:06 pm

Gas Taxes and Long Range Energy Planning
By Robert Rapier

I consider the level of dependence of the U.S. on imported petroleum to be a very large financial risk endangering the country’s future. There are certainly other import-related risks as well, but here I want to talk about the financial risk.

I consider it similar to having a mortgage upon which you pay interest each month – but in which the interest rate can fluctuate wildly. If you typically pay 7% interest on your mortgage, but your rates quickly climb to 12%, a lot of people would find themselves in a deep financial hole. Come to think of it, a lot of people did when they found themselves in a similar situation. They gambled on the future and lost.

With respect to oil prices, we are also gambling on the future. We import a bit over 9 million barrels per day of crude oil (we also import gasoline, diesel, etc.) Each $10/bbl increase in the price of oil means that consumers pay $33 billion more each year for oil. We are now paying $100 billion more each year for oil than we were just a few short years ago, and that money comes out of all of our pockets. This acts as a tax upon the U.S. economy, albeit one that doesn’t primarily benefit U.S. citizens.

The drain on the U.S. economy is one thing, but the risk is quite another. Why do we tolerate that sort of price risk? In my opinion, it is because tolerating the status quo is viewed by politicians as the cheapest, most politically safe option. And even if they are concerned about the risks, when economists say that oil might be going back down to $30, politicians are paralyzed from taking action. The uncertainty is a killer.

. March 9, 2011 at 6:56 pm

So why has so little been done? A big reason is the cyclical nature of oil concerns.

It goes like this: Oil prices soar for one reason or another, economies tank, and everyone agrees that something has got to be done about our dangerous addiction to oil. But economic recession reduces demand and new production comes on line. Prices fall and people are delighted. No more pain at the pumps!

Consumer demand for improved efficiency ebbs, so the private sector abandons research and development. Citizen demand for government action also dwindles, so funding for conservation programs and alternative energy research dwindles.

And so we swing from panic to complacency and back again without ever doing what needs to be done.

Some pundits like to say talk of getting off oil is utopian nonsense. It would take decades and be fantastically expensive, they say. But what they don’t mention is that the status quo is also fantastically expensive (literally trillions of dollars have been spent securing the Persian Gulf, to name but one cost) and the job could have been done by now if we had ignored pundits like them in the past.

“It would appear that the oil importers would probably need 30 years or more to create an energy economy based overwhelmingly on sources other than oil,” concluded a paper published in Foreign Affairs … 31 years ago.

Gloomier pundits also contribute to inaction by insisting that the price of oil is never going to come down again. It follows from this that new policies aren’t needed. Private investment will pour into conservation and energy research and we’ll kick our addiction, whether we want to or not.

But people have been saying that, too, for decades. And they’ve been wrong. Maybe that will change this time. But why chance it?

The solution is a “floor” on the price of oil. Yes, it’s a tax. But it wouldn’t kick in now. Only if the price of oil fell below the “floor” would it start, and its bite would depend on how far the price of oil fell. If it went only a little below the floor, the tax would be small. If oil fell far below, the tax would grow, with revenues used to cut income or other taxes.

. May 26, 2011 at 11:48 pm

Save resource money for the future? Nah, says Alberta
JEFFREY SIMPSON
From Wednesday’s Globe and Mail
Published Wednesday, May. 25, 2011 2:00AM EDT

Dead on arrival. Such is the fate that awaits the report from a blue-ribbon panel on Alberta’s future.

So radical is the report, from a group who are the antithesis of radicals, that it has no chance of being accepted by the bulk of Albertans. Why? Because the report, in essence, requires short-term pain for long-term gain, a recipe for political defeat almost anywhere.

No one in Alberta politics with a hope of forming a government would dare offer that option to a public accustomed for decades to using natural resources revenues to pay for today’s expenses while saving almost nothing for tomorrow.

Albertans don’t tax themselves adequately to pay for the services they demand and use. Instead, governments present budgets – whether in surplus, balance or deficit – that use revenues from natural resources to pay for about 30 per cent of the services.

Long gone is former premier Peter Lougheed’s grand plan to build a huge Heritage Fund with resource rents, the interest from which could be used to invest in the diversification of Alberta’s economy. Since he departed, governments have largely ignored the fund. Indeed, the province’s energy minister, asked about Norway’s multi-hundred-billion-dollar savings and investment fund from oil revenues sniffed that Alberta had nothing whatsoever to learn from Norway.

http://www.theglobeandmail.com/news/opinions/opinion/save-resource-money-for-the-future-nah-says-alberta/article2033331/

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