Now is the time to tax oil

I filled up my car this morning and it occurred to me that gas prices are about half what they were in June at the height of the latest gas-price spike. To a large extent, the increased gas prices have contributed heavily to our downward spiralling economy--resulting in increases in everything from gasoline to milk, virtually anything that has oil fuel as a component in manufacture or distribution.

During the summer, with oil prices high, the country (indeed, the whole planet) has had a long overdue discussion on our over-dependence on oil, oil's impact on our environment, the funding of hostilaties against us in oil-producing regions where we are not particularly liked, and the instability it creates in our economy. Unfortunately, a lot of TGIF discussion is beginning to die down now that oil prices are coming back down to levels seen before the latest spike. And that is the problem.

We have short-term memories. Assuming the financial crisis is resolved and credit begins flowing again, people will flock to the sharply reduced over-sized, gas guzzling SUVs--at least they will until the next gas spike. And that's the problem, our short-term memories get in the way of developing good, long-term behavior. There is a solution.

Taxes. I know it is an obscene concept, but taxation can play a very pivotal role in the transition to a non-oil-based economy. The problem is two-fold. First, as long as oil is incrementally cheaper than alternatives, there is little incentive to innovate alternatives. However, the point at which oil costs permanantly exceed alternatives, the impact will be devistating until such time as alternatives and the infrastructure are developed to deliver them. This is where taxation can play a positive and constructive role.

Increasing taxes on oil can level the competitive market allowing alternatives to be developed more rapidly. This would be done by two forces: first, taxes on oil would make oil consumption less attractive, resulting in higher tax revenues per gallon of fuel consumed and providing money that could be used to subsidize fledgling alternative fuel sources until they can gain economies of scale. A second benefit results from reduced consumption which in turn results in reduced demand, which in turn results in reduced oil prices. Keeping taxes on oil at an artifically high level basically means that oil producing nations help subsidize our development of alternatives. As the cost of alternative fuel production falls, subsidies can be lifted and oil taxes can be reduced, allowing natural market forces to take over.

So, we can pay now or we can pay later for the transition from oil. The longer we wait, the higher the cost. Had we heeded President Jimmy Carter's warning, we would not be in this situation.

Your thoughts?

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