Economics for your Classroom from
Ed Dolan’s Econ Blog The Economics of a Price- Smoothing Oil Tax Revised Nov. 13, 2014 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.

Oil Prices Crash—Should We Celebrate?
 Oil prices have fallen below $100 for the first time in more than two years.  Consumers are dancing at the gas pumps, but economists and environmentalists have reservations  Big fluctuations in oil prices cause uncertainty that undermines investments in energy conservation  What could be done to protect against oil price volatility? Nov. 13, 2014 Ed Dolan’s Econ Blog

How Oil Producers Protect Themselves
 Oil producers like Norway, Russia, and Saudi Arabia have learned to protect themselves from the curse of oil price volatility  They do so using national wealth funds that build up when prices are high and run down when prices are low A Norwegian Oil Platform Under Construction Photo source” Ranveig http://commons.wikimedia.org/wiki/File:Oil_platform_Norway_new.jpg Nov. 13, 2014 Ed Dolan’s Econ Blog

How consuming countries can protect
themselves  Strategic oil reserves can give consuming countries some limited short-run protection against supply interruptions  To encourage energy efficiency, they can use a price smoothing oil tax  Such a tax would put a floor under energy prices and encourage investment in conservation measures like fuel-efficient cars, better home insulation, and more efficient industrial processes Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

How a Price-Smoothing Oil Tax
Would Work  A price-smoothing oil tax would begin by setting a floor oil price X  When the world price P falls below X, a tax of P-X would make up the difference  When the world price rises above X, the tax would be zero Photo source: http://commons.wikimedia.org/wiki/File:Gas-pump-Indiana-USA.jpg Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

An Oil Tax would Enhance
National Security  When world oil prices are high, money flows producers may of whom are corrupt, undemocratic, or anti- American  An oil tax would insert a wedge between the US price and the world price  Pushing the US price higher would encourage conservation and investment in alternative energy  Pushing the world price lower would deprive hostile countries of revenue Photo source:http://commons.wikimedia.org/wiki/File:Marines-with-sniper-rifle-2.jpg Nov. 13, 2014 Ed Dolan’s Econ Blog

Protecting the environment is not
all about climate change  High prices encourage investments in conservation and alternative energy  That is important for people who are concerned about climate change, but that is not the only environmental benefit  Energy efficiency also has immediate, tangible benefits on local air quality, health, and road congestion Photo source: Massimo Caratinella http://commons.wikimedia.org/wiki/File:LosAngelesSmog.jpg Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

A Variable Oil Tax Could
Help Protect Against Recession  Oil price spikes have often be followed by recessions in the United States  High oil prices reduce spending on other goods and services and undermine consumer confidence  A tax-smoothing oil price would help reduce the volatility of oil prices Economist James Hamilton has written extensively on the effects of oil price shocks on the US economy. See his recent blog post on Econbrowser for some data and references Nov. 13, 2014 Ed Dolan’s Econ Blog

Energy Taxes are Good Fiscal
Policy No one likes taxes, but taxes of some kind are an unavoidable part of public finance. If introduced on a revenue-neutral basis, a price-smoothing oil tax would improve incentives for energy efficiency while permitting a reduction in other corporate or personal taxes that distort incentives elsewhere in the economy Nov. 13, 2014 Ed Dolan’s Econ Blog

The Bottom Line The bottom
line:  We do not have to accept the damage to national security, the environment, and the economy caused by extreme oil price volatility  A variable, price-smoothing oil tax could mitigate extreme swings in oil prices and improve incentives for investment in conservation and alternative energy Nov. 13, 2014 Ed Dolan’s Econ Blog

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