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The end of the Oil Age, Part I

In this week's Economist, prominently featured on the front cover, there's an editorial entitled The end of the Oil Age.

The article points out that the use of oil imposes "externalities" on society. In the glossary of the economics textbook I still have from my MBA program, an externality is defined as "an action by either a producer or consumer that affects other producers or consumers, yet is not accounted for in the market price." In other words, the dirty smelly fumes that come out of the oil harms everybody else, so in the absence of any compensating tax on the oil, the person burning the oil is getting a free ride.

It's clear to me that burning fossil fuels does creates externalities. Anyone who has ever had the misfortune of driving through Elizabeth, New Jersey or Midland, Texas (it's hard to imagine why our President would choose to live there) knows that smelly oil refineries harm everybody in the vicinity.

The Economist is a little further out in left field when it says that the other externalities are having to rely on the unstable Middle East for our oil, and having to pay them above market prices because of the OPEC cartel.

I'm not a big fan of Middle East nations, but I don't think that the price of oil is too high. It only costs Microsoft a few pennies to stamp out a copy of Microsoft Office, but they sell it for several hundred dollars. The way I see it, OPEC countries have just as much right to charge as much as the market will bear for their oil as Microsoft has to charge as much as the market will bear for Microsoft Office. OPEC would be pretty stupid to sell it for less than people are willing to pay for it.

The political risks associated with the oil supply are unfortunate, but also unavoidable, because oil is an important resource with no good substitute. I don't see how reducing the amount of oil used in the United States would change anything in this regards, because we still need at least some of it, and because it's a global commodity, no matter how little or how much the United States uses, a sudden stoppage of Middle East oil will harm every oil importing nation on the planet.

The Economist recommends taxes on gasoline, and I support this. But I also predict that there won't ever be a significant gas tax increase in the United States because Americans love their cars, and they get mad, really mad, when the price of gasoline goes up. And because we have a democracy, neither Democrats nor Republicans want to get the people mad.

Most people who support "energy conservation" think it means that other people will conserve energy while they continue to fill up their SUVs with cheap gasoline. If energy conservation is good policy, then the only method of conservation that really makes sense is to tax gasoline and other petroleum products. If the price is higher, people will use less. And the free market will allocate who uses the petroleum products and for what purpose.

Unfortunately, our politicians have no understanding of basic economics, so they passed dumb laws like fuel economy standards for passenger cars which, of course, had the major loophole that SUVs were considered light trucks so the standards didn't apply to them. But the voters prefer laws where the costs to them are hidden, instead of sensible laws such as a fuel tax where the cost is clear and in the open for everyone to see.

Please check back soon for Part II of this commentary.

posted Thursday, October 30, 2003