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Wednesday, October 19, 2005

F = ma Files

"..our understanding of the liberal conception of [energy independence] is as follows:

The government should establish policies aimed at reducing the use of oil (fuel-economy standards, higher gasoline taxes, incentives or coercive measures to encourage use of public transit, etc.).

This in turn is would reduce our dependence on foreign oil, helping to starve the Arabs and thus reduce terrorism.

For the sake of argument, let's take the first part of this argument--that the government could reduce oil consumption, effectively a reduction in demand--as a given. Basic economics tells us that a reduction in the demand for a commodity will lower the price. What happens when the price of oil goes down? High-cost oil production becomes uneconomical, which means that low-cost producers end up accounting for a greater share of the market. The lowest-cost producer of all is our friends the Saudis. Thus "energy independence," if effective at all, would actually make America more dependent on "foreign" (Arab) oil." - Jas. Taranto, BOTWT 19OCT05

Unlike the pop-conservatives at the Federalist [sic] Patriot, I don't intend to get all of my material from Taranto. This one, though, deserves to be put in the F = ma files.

The other problem with reducing demand for oil is that the demand curve for gasoline has varying elasticity. Unless a total moron tried to implement some rationing scheme, the way to lower demand for oil is to institute taxes on every barrel of oil or gallon of gasoline. The latter would likely be more effective.

This would quickly cut down the number of trips to the convenience store and to the beach, although it would also reduce consumer spending in other areas (The total amount spent on recreational gas usage would almost certainly rise). In order to avoid destroying our economy, income taxes would have to be cut by an amount equal to the gas tax. Since Miles driven are less dependent on income than, say, the income tax, this would in effect be a regressive tax that soaks the poor. The other option is to give non-taxpayers a rebate, which would itself cause problems.

Ignoring that apocalypse for the moment, the recreational use of gasoline would be curtailed. However, at a certain point people have to use gasoline. Public transport runs on gas. Electric trolleys run on power generated by fossil fuel plants. There is a point where the demand curve for oil becomes so inelastic that you could raise the price of gas to, say, 3.00$US a gallon and people would still drive. Or 6$US. At around 15$US I think we'd see a fundamental change in the technological base of our civilization, but... I digress.

Let us say there is a more reasonable gas tax imposed. Demand decreases. Global oil prices stay constant because we're not the only ones buying oil. The Arabs are still making money, our economy is failing, and we no longer have leverage over them.

Or let us say that the global price of oil does fall. In a decade, this will result in less infrastructure and a return of oil prices to nearly the same level. If there is a supply disruption, people can't cut down on oil use, because all the fat has already been trimmed.

Until the Sierra club lets me build my nuclear car, they are responsible for global warming, terrorism, and taxes.

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