Monday, April 04, 2005

Is it time to put a floor under oil prices?

It may sound ludicrous to suggest putting a floor under oil prices, but there are three good reasons to consider it. First, oil companies are reluctant to spend money on exploration and development because they have been burned again and again by slumps in price in the previous 20-year bear market in oil. If the resulting increased production can delay a peak in world oil production even a few years, this extra time could help facilitate a non-catastrophic energy transition by increasing the amount of time we have to build an alternative energy infrastructure. Second, a floor under prices would ensure a robust market for alternative and renewable energy. Third, higher prices would encourage energy conservation. If people know that oil prices will NOT go down regardless of future supply, they will act accordingly. (The poor could be given rebates or tax credits to soften the blow of higher energy prices.)

Many mechanisms can be used to achieve this, but perhaps the most elegant is the variable import fee. If the minimum price of oil was set at say $50 a barrel, then when oil falls to $42 a barrel, an $8 a barrel fee kicks in. The money generated from such a fee could go toward financing the energy tax credits for the poor and tax incentives for the installation of wind and solar power, for example.

The political prospects for such a fee are better than you might think. Domestic oil and gas producers will support it because it puts a floor price under their production. Environmentalists will support it because it means large investments in alternative energy, but especially if that alternative energy is renewable and clean. Defense hawks will support it as a way to reduce our vulnerability to oil imports. Doves will embrace it as a way to avoid war over oil. Advocates for the poor will go along with it if the burden on the poor is eased by credits.

No doubt a bunch of ideologues will oppose it as "unjustified intervention" in the free markets. I'm not sure they would prevail if the proper coalition could be brought together. There are too many enticing goodies in an oil import fee. And, the fact that it would be good for the country might help, too.

No doubt other countries could do something similar. If the strategy were applied worldwide or at least by say, the United States, the European Union, and Japan, it might just work as advertised.

(Comments are open to all. See the list of environmental blogs on my sidebar.)

No comments: