Gasoline prices are down more than $1.00. This is a gift for the poor and middle class like no other. In many cities and rural areas where mass transportation isn’t the standard form of commute, this is equivalent to an influx of thousands of dollars a year. Every American must choose how best to spend or save this unexpected windfall.
It is first important to understand why oil is falling. Price per barrel of oil was high enough to make it profitable to bring hard to reach (read expensive shale and other types of formations) oil to the market. This in turn flooded the market with oil as new sources were constantly brought on. Supply and demand, the market dictates that a fall in price would occur.
Normally big producers like OPEC, specifically Saudi Arabia would curtail production to stabilize prices. They however have no intent of doing so. They want to decimate American shale production by making oil so cheap that shale producers are forced to stop and go bankrupt.
Saudi Arabia is betting that Americans are insane. We all know the classic definition of insanity. Insanity is doing the same thing over and over again and expecting a different result. Empirical data suggest Saudi Arabia may be correct.
The following snippet from the USA Today piece “Automakers challenged by low gas prices” may prove how right Saudi Arabia and many in the Oil Industry are.
It’s not just that gas prices are the lowest since 2009, but also a sense by some buyers that this time they may stay low. That’s hurting sales of hybrids and small cars, while leading to higher demand for SUVs and pickups.
As 2014’s final sales tallies are revealed this week, they are expected to show the disparity. In a boom year for the the auto industry, sales of small cars grew 4.2% through the first 11 months, according to Autodata. But sales of pickup trucks were up 5.4% and sales of SUVs of all sizes were up 11.7%.
Perhaps most telling, sales of the Toyota Prius, the leading hybrid car, were down 15.8% over the period.
Lawrence Summers has an insightful Washington Post piece “Oil’s swoon creates the opening for a carbon tax” that suggests it is the time for a carbon tax. It is a tax where liberals and conservatives alike can support without compromising their views. He says the following.
Progressives who are most concerned about climate change should rally to a carbon tax. Conservatives who believe in the power of markets should favor carbon taxes on market principles. And Americans who want to see their country lead on the energy and climate issues that are crucial to the world this century should want to be in the vanguard on carbon taxes. Now is the time.
Conservatives should support an increase in the gasoline tax (carbon tax) based on fiscal responsibility. The price of gasoline, heating oil, coal, and gas do not include the cost all Americans are paying after these fossil fuels are burned. We all suffer from mercury in the lakes and river, particulates in the air, cancer alleys around refineries, climate change, and much more. A few companies pocket that differential (an ingenious form of stealing) as legitimate profit. In effect we pay for the property damage and illnesses their products create.
Liberals should support an increase in the gasoline tax (carbon tax) based on environmental and health concerns. We continue to need fossil fuels. The carbon tax effectively designed mitigates both problems. It reduces demand as higher prices promote efficiencies. Some of the increased taxes could be used to continue the development of renewable sources of energy, carbon sequestration, infrastructure, and health care.
It is important however that this be addressed quickly as our American insanity is about go into full gear. The ‘market’ needs some help to prevent it from giving Americans honey they will later regret.