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.