Let Markets Work!

Last week, as oil surged to $75/barrel and retail gasoline prices broached the $3/gallon level again, came renewed calls for the government to “do something, anything”. The thinking on this issue continues to be highly confused.

The loudest cries were for the imposition of windfall taxes on oil companies. True, the profits that the majors are generating do border on the obscene. But, exactly how would a windfall tax on oil companies reduce energy prices?

And, more fundamentally, are lower energy prices what is really good for us? Don’t we want higher prices, so as to encourage more alternative energy and energy efficiency?

Every time that our beloved government steps in to try to reduce energy prices, it further perpetuates and entrenches the “cheap energy” entitlement mentality — or what President Bush himself has called our “addiction to oil” — that we desperately need to wean. Why is it that the US consumer gets indignant about $3 gas, when prices have been twice that high in Europe for years without civic unrest?

Instead, we ought to let the energy markets work: as demand continues to increase robustly (thanks to China and India especially) and low-cost supply sources become scarcer, oil prices damn well should increase.

About the only good that is coming from this recent angst about high energy prices is the (better-late-than-never) suggestion to discontinue some subsidies to major oil companies for operating/expanding in an industry as fully mature and profitable as conventional oil/gas production and refining.

Otherwise, instead of taxing them more highly (because we’re too stupid to see high price signals as an encouragement for substitution or demand reduction), we ought to encourage the oil companies to plow their huge profits into advanced energy — perhaps a tax credit on qualified investments in innovative energy technology R&D or new energy commercialization or project development.

Then, the high energy prices would not only be directly sending price signals that the marketplace needs to see to discourage consumption, but be redirecting the enormous profits into financing the next (cleaner) energy era.

We in the cleantech arena need to speak louder, to help shift the conversation in the U.S. away from “cheap energy”, to “permanently available energy”.

11 replies
  1. Cody
    Cody says:

    If we're gonna feel righteously indignant about oil company profits in the current climate, fine. Go ahead and tax them (or reduce subsidies) either way, it certainly won't lower prices, and it will generate a hefty wad of cash that could be used for all sorts of cleantech incentives. If California can pony up $3 billion for PV incentives, surely the feds could institute a similar program.However, even better would be a bit of creative program design to leverage the money. For instance, sinking a portion into lowering marginal tax rates on the lowest income bracket – a giveback that can effectively counter the primary argument against high gas prices: that they fall disproportionately heavily on the working poor. This sort of tax shift should be fairly efficient, and would keep the right price signals for energy in place while making sure the price change does not harm more vulnerable populations.

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