I met a Democratic candidate for US Senate from NH last night, Jay Buckey. I was at a reception for a Tuck event and a colleague made sure to bring Mr. Buckey over to see me. My colleague was bored I guess and wanted to see some excitement. I don't think I disappointed him. I only wish I had had a little chance to prepare, but I have not been following the Senate race.
Buckey has a good resume and seems to be a nice and sincere person.
As the reception was for Matt Simmons, the leading proponent of the "Peak Oil" idea, Mr. Buckey and I naturally gravitated to discussion of oil economics. Mr. Buckey has a proposal, available here. It is a tax on all oil consumed in the US, with the tax being variable on the basis of world oil prices: if world oil prices rise, the tax falls, and if the price falls, the tax increases. Well, maybe I am being generous: The actual wording of the proposal is that if the price of oil falls, the levy WILL be increased, but if the price of oil "spikes" then the levy "could be suspended." Ah, you have to love that kind of language.
Now as an economist, I have said many times, I do support the concept of internalizing externalities. Consumption of oil does impose externalities, so there is a case for some taxes. My first question for Mr. Buckey is how he knows that the current taxes, as well as a possible monopoly rent built in, do not already do the optimal compensation for externalities.
But I have two bigger concerns. The first is the purpose of the variability. The goal here, according to Mr. Buckey, is to create a floor for oil prices so to give alternative energy sources in the US the assurance they need to be developed. Isn't that great? How many producers would like the assurance that their main competitor will never charge a price lower than $x? It sounds great, but it is nothing more than your typical Democratic meddling in markets. Bear in mind that the real price of oil today is still less than its peak in 1980. If we had implemented this price floor back in 1980, we would have foregone 28 years of cheap energy. Let's leave it to market forces to decide which source of energy should be developed.
Also, the externality case for a tax on oil does not have that tax varying according to the price of oil, only according to the marginal damage caused by burning the oil.
If new energy sources cannot attract capital given the historic volatility of oil prices, it is prima facie evidence that those sources of energy are uneconomic. You can argue with me about adding a premium for avoiding the externalities associated with oil, but we will have to do that analysis carefully, accounting for the taxes already on oil.
I think my biggest objection to Buckey's idea is that he calls it the National Security Levy. In my talk with him, he was adamant that we are militarily engaged in the Middle East to protect our oil interests, and therefore we should have a tax on oil to represent that cost. While I agree in principle with this argument, in this case the magnitude of my agreement is quite slight. Mr. Buckey kept saying that there are other unstable parts of the world where we are not engaged, hence it must be the oil of the Middle East. First, what about Afghanistan? We were attacked by terrorists from Afghanistan, and there is no oil production there. So that part of the defense budget should not be attributed to oil. And I think Israel would be rather taken aback if they learned that we are only in the Middle East to protect our oil interests.
I think the link between oil in the Middle East and our military involvement there is not due to a desire to protect our CONSUMPTION of oil, but because the presence of oil reserves in the Middle East gives countries there a huge revenue source with which to create trouble. If we stopped buying oil from the Middle East, China and India would welcome our absence. The oil suppliers would still have billions of dollars annually to spend on weapons and disruption. If we value our freedom and that of other countries, I contend that we would still be militarily engaged.
So to say that we are in the Middle East for oil is not precise. We are there because of oil, but more precisely, because the oil reserves of that area give additional strength to any enemies located in that region. I would put forth that our engagement as a customer gives us some political power that we would forsake if Buckey's National Defense Levy succeeded in getting us to buy less Middle Eastern oil.
I tried to get Mr. Buckey to buy into my ideas for the Democratic party of being socially libertarian, fiscally conservative, reasonably strong on national defense, and leaving economics to market forces, but I don't think he bit.