Energy Policy for an Economic Downturn: A Proposed Petroleum Fuel Price Stabilization Plan

By Merrill, Thomas; Schizer, David M. | Yale Journal on Regulation, Winter 2010 | Go to article overview
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Energy Policy for an Economic Downturn: A Proposed Petroleum Fuel Price Stabilization Plan


Merrill, Thomas, Schizer, David M., Yale Journal on Regulation


A compelling case can be made for reducing America's consumption of petroleum fuels. Nearly all analysts think that the way to slash consumption of petroleum fuels is through an end-user tax. There is, however, widespread public opposition to higher gasoline taxes. Furthermore, in a recession the appropriate fiscal policy is to cut taxes, not to raise them. This paper proposes a method of stabilizing petroleum fuel prices at a sufficiently high level, without reducing aggregate consumer purchasing power. We introduce a revenue-neutral petroleum fuel price stabilization plan, called the "PFPS" plan for short. Under this plan, a government surcharge on the price of oil would phase in and out in an inverse relationship to changes in world oil prices, such that retail prices would rise with increases in the price of oil but would not appreciably fall when the price of oil declines. Any levies collected under the plan would be fully refunded to consumers pro rata. We describe the advantages of such a plan relative to a Pigouvian tax or a program of subsidies and regulatory mandates, as well as its disadvantages. One advantage is that it might incur less political opposition than a tax, because the share of GNP devoted to government would not change (given full refundability), and the government would not be imposing a new cost on voters, but only depriving them of contingent benefits associated with future oil price declines.

Introduction

A compelling case can be made for reducing America's consumption of petroleum fuels. The combustion of petroleum fuels is associated with a variety of external costs, most prominently, but not exclusively, the emission of greenhouse gases that contribute to climate change. The fact that nearly two-thirds of petroleum fuels are imported also has serious implications for national security, by making the United States vulnerable to supply interruptions, and by underwriting oil-rich dictatorships and regimes hostile to American interests. Finally, the heavy dependence on petroleum fuels threatens the economy, as oil price shocks have contributed to three major recessions in the last forty years, including the recession that began in 2008.

We do not believe that targeted government subsidies and regulatory mandates represent an effective strategy for reducing petroleum fuel consumption. The history of such efforts is not auspicious. Subsidies for oil shale in the 1970s cost taxpayers billions of dollars with negligible results. The Corporate Average Fuel Economy requirements for automobile manufacturers, first imposed in the 1970s, promoted a shift from cars to minivans and sport utility vehicles (SUVs), but have had at best a modest impact on aggregate fuel consumption. More recent efforts to promote ethanol production have probably resulted, on balance, in a net increase in energy consumption.1 Conceivably today's fashionable ideas, such as subsidies for wind and solar power and for purchasing hybrid vehicles, will fare better. But history suggests that Congress, which will ultimately determine the beneficiaries of targeted subsidies and mandates, has no comparative advantage in picking technological winners and losers. Marching down this road again may result only in wasted resources and further delay in achieving real progress.

Among serious policy analysts, there is nearly uniform support for the proposition that the most efficient way to slash consumption of petroleum fuels is to increase prices. Higher fuel prices should trigger millions of individual adjustments on countless margins, involving which car to drive out of the driveway, whether to make an extra trip to the store for that last dinner item, whether to work at home one day a week, and the like. Over the longer term, the response to higher prices should be even more dramatic, as consumers make different decisions about what kind of car to buy, where to live, and whether to form a car pool, and as entrepreneurs and investors compete to develop promising alternative energy ventures.

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Energy Policy for an Economic Downturn: A Proposed Petroleum Fuel Price Stabilization Plan
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