The consequences of falling oil prices, and the benefits of high oil prices

Lynne Kiesling

At Econbrowser, Jim Hamilton has a very thorough post on the economic consequences of falling oil prices. Consumer confidence, inflation, GDP, Fed policy, … and his conclusion is not very optimistic in the short run.

In fact, here’s a question for you: will the short-run and long-run adaptations of consumers and producers actually be beneficial enough to make high oil prices net beneficial? And is it possible for that adaptation to include the political will to streamline energy policy away from targeted subsidies/pork?

The wonderful economist Robert Pindyck takes on some of these questions in a recent interview in which he comments on the energy policy proposals of the two dominant presumptive Presidential nominees.

Pindyck — an expert in microeconomics and industrial organization, the behavior of resource and commodity markets, capital investment decisions, and econometric modeling — recently examined the energy plans put forth by senators Barack Obama and John McCain as posted on their web sites. He was not impressed.

But, as Pindyck acknowledges, being honest about what it would take to wean Americans off oil could be political suicide.

Pindyck’s policy proposal: eliminate alternative energy subsidies and/or implement carbon pricing and a gasoline tax:

Look, what are going to be needed ultimately is a tax on carbon and a tax on gasoline — a large one. Another way to have a tax on carbon is to have a cap-and-trade system so you only allow a certain amount of carbon dioxide to be emitted. That will raise the cost of carbon. A gasoline tax would greatly reduce gasoline use. It would create the incentives we need for other energy sources, including conservation.

The theory behind Pindyck’s proposals is straightforward microeconomics, including its absorption of the Austrian concept of the subjectivity of preferences. Targeted subsidies presume that the party choosing the targets (i.e., the Federal government) knows what the “optimal” alternatives are, which means both that they know the relative costs and benefits across all alternative energy technologies AND that they know the preferences and evaluation of opportunity costs of all of the affected consumers. Similarly, regulatory responses are prey to the same fallacy of centralized control critique.

Only government is arrogant enough to presume such knowledge, or to be indifferent to the costs imposed by their failure to aggregate such knowledge.

Thanks to The Economist’s Free Exchange blog and to Mark Thoma at Economist’s View for the link.

UPDATE: see also posts from Greg Mankiw (touting the “Pigou Club” interpretation of Pindyck’s remarks, naturally) and from John at Environmental Economics on the Pindyck interview.

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4 thoughts on “The consequences of falling oil prices, and the benefits of high oil prices

  1. I agree it’s a knowledge problem alright.
    There is much more to what this article does NOT say than what it says.

    Convoluted by the Austrian drivel.

    So, we agree that wee need carbon taxes and gasoline taxes.

    But, WAIT.

    We need a free-market based carbon tax.

    You know with a free market financial, hedge-funding, derivative-based speculation advantage for those “who have to put up their own money”.

    What we need is a carbon tax. Period.
    A very real tax on carbon.

    As the Congressional Budget Office(CBO) found in its analysis, the carbon tax is the most efficient means of achieving our sustainability goals.

    Cap-and-trade is a tax alright.

    A tax that is controlled by the high falutin capitalists once it has been let to the market.

    Oh, I see.

    Corporate Socialism.

    Let the free market run the tax system.

    I am sure it would be much more efficient that that cranky old government.

    Yeah, that’ll do it.

  2. I do not agree that we need either carbon taxes or gasoline taxes. There is no legitimate function of government that requires either. Behavioral modification is not a legitimate purpose of taxation.

    The US can not accomplish anything, on its own, to reduce global CO2 emissions in absolute terms, especially in the face of 10%/yr. increases in CO2 emissions by the globe’s largest CO2 emitter. Global problem: global solution or no solution.

  3. I do not agree that we need either carbon taxes or gasoline taxes. There is no legitimate function of government that requires either. Behavioral modification is not a legitimate purpose of taxation.

    The US can not accomplish anything, on its own, to reduce global CO2 emissions in absolute terms, especially in the face of 10%/yr. increases in CO2 emissions by the globe’s largest CO2 emitter. Global problem: global solution or no solution.

  4. If a gasoline tax, “a large one,” was the solution to the problem, wouldn’t a sentient person ask why Europe hasn’t yet achieved viable sources of alternative fuels? In many countries, i.e. Netherlands and Norway, the price of fuel is more than doubled by the imposed taxes.

    Rather, it is the wishful thinking of dystopians who desire wresting more control over other peoples’ lives who propound such idiocy. Free markets don’t require subsidy to ideate, invent, or produce realistic alternatives to current products…

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