Oil Crisis 2008: Economics Lessons Learned and Not Learned


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“Tax breaks for wind and other alternate energy ... come just as the price of oil has fallen, and with it the incentive to use the tax breaks at all. This is the downside of falling oil prices: they set us up to recycle the whole energy crisis time and time again.”

But are we not going to solve the problem with alternate energy? Congress did extend critical tax breaks for wind and other alternate energy as part of the financial bailout bill, but this was after a year of dithering over how to pay for the cuts. The result is that these tax breaks come just as the price of oil has fallen, and with it the incentive to use the tax breaks at all. This is the downside of falling oil prices: they set us up to recycle the whole “energy crisis” time and time again.

Economists have known the answer to problems with oil price volatility—and the answer to oil’s contribution to environmental problems such as climate change. It is the word that cannot be spoken in America: taxes.

A tax on oil consumption (all oil, domestic and imported) would continue the signal that oil is something to be used sparingly. The revenues could be used to fund help for people with low incomes to adopt conservation measures (the people least likely to do so). Revenues could be used to encourage new conservation and production technologies.

And a portion of the revenues could be set aside to even out oil price spikes. Oil taxes could be lowered during spikes while funding for highway and other projects could continue.

Such an approach would also directly address the need to price our use of carbon—or more accurately the sources of carbon dioxide—in order to begin to address the critical problem of climate change.

But the idea of imposing taxes when oil prices are high is a political nonstarter. And when prices fall, it is a political nonstarter. We are far more comfortable paying exorbitant oil prices to the producers than using the same prices for our own benefit.

So, one cheer, or maybe two, for high oil prices. They remind us that this critical resource is scarce and that we should work very hard not to waste it. It is a lesson we cannot afford to forget this time.

Charles Colgan is professor of public policy and management and chair of the graduate program in community planning and development at the Edmund S. Muskie School of Public Service at the University of Southern Maine. He is associate director of the USM Center for Business and Economic Research.

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  • On November 2, 2008, C Smith wrote:
    It shows how conditioned we quickly became to oil at $140 a barrel that we should be relaxed now. You are right of course. Oil production has peaked and the present banking crisis with its consequent economic regression will lull many of us into believing that, in a couple of years, all will return to normal. This is the political mantra after all. Indeed, I see some commentators are suggesting we can go out and buy gas guzzlers again: heat off. Nuts. Normal had become very, very expensive oil, that we could not, cannot, afford. Any minute now there will, as you suggest, be another oil supply shock. At this point head for the hills, if you have access to a hill, and nobody else is on it of course. My contention is that we have entered a new fifth century, and you know what happened to the west then.
  • On December 3, 2008, Ken Bruder wrote:
    Alternative energy is being hit with a triple whammy--not only does the lull in oil prices depress development, but also the fact that many deployments of clean energy are early stage and capital hungry impedes build out of new infrastructure. The credit crunch could not have come at a worse time. However the fundamentals remain strong...energy security is a top concen and nearly all scientists say climate change is still getting worse. Also the post WW-II energy infrastructure is falling apart and needs radical updating. Rather than tax oil (something that Congress will never pass), the more expedient route will be to impose a carbon cap and trade system or a neutral revenue carbon tax...any revenues generated can be used to invest in smart grid deployment and energy efficiency retrofits. This would be a radical restructuring of the markets and can only come about if we have some true energy leadership...something sorely needed in America.