"Low Oil Prices Are Bad, Some U.S. Experts Say" - headline, New York Times, March 12, 1991.
WASHINGTON - Back in April 1986, Vice President George Bush flew to Saudi Arabia hoping to "sell very hard" the idea of oil price "stability." Prices at the time were crashing. The vice president was trying to prevent "a continued free fall."Lucky for us, Bush failed. The free fall continued and was instrumental in breaking inflation, lowering interest rates, and kindling the longest peacetime expansion in American history.
Bush's attempt to arrest the oil price decline was an example of economic myopia and Texas provincialism at its worst. But Bush was backed by a whole cadre of American experts who since 1983 had been preaching doom and gloom for the American economy if oil prices, then at $34 a barrel, were allowed to decline precipitously.
Well, the world is in the midst of another oil glut which, if left to the market, could cut today's oil prices by as much as one-half. And what do we hear?
"Prices may fall to the midteens, and this is a disaster for the United States," said Charles Ebinger, an energy expert at the Center for Strategic and International Studies.
And this from Sidney Jones, assistant secretary of the treasury for economic policy: "It would be disadvantageous for the American economy if the price (of oil) were to fall into the low teens."
This is nonsense that will not die.
The history of the past 20 years is a history of the Western economies going into recession and worse when oil prices spike up, and going into expansion and prosperity when oil prices crash down.
The oil shocks of the 70s, 1973-4 and 1979-80, were not just a huge excise tax on Western economies that caused severe economic contraction. They simultaneously caused our oil-based economies to experience the worst inflation in 40 years. We had the worst of both worlds - recession and inflation.
Conversely, oil price collapses, like that of the mid-1980's, have given us the best of both worlds: growth with low inflation.
The gulf crisis replayed the scenario in miniature. Last year, the minishock caused by the invasion of Kuwait doubled oil prices within a matter of weeks and helped tip the American economy into recession. This year, the collapse of oil prices as a result of America's decisive victory is one of the spurs for getting the economy out of recession.
Yet we have an assistant treasury secretary saying that a further collapse of oil prices would be bad for America. Why? The usual argument is that if prices fall too far we will return to our old gas-guzzling, energy-wasting ways.
Oil consumption goes up, imports go up, production goes down, demand soon outstrips supply and we have set ourselves up for the next oil shock.
That is a real problem. It has two solutions. Solution 1, the kind Bush pursued explicitly in 1986 and which his administration seems to be quietly encouraging today, is to encourage OPEC to rig the market, curtail production and artificially raise prices. That is the stupid solution.
Solution 2 is simple and highly advantageous to Americans: Let the market work and the price drop, then tax the windfall.
We are now paying OPEC roughly $20 per barrel for oil. Let the current postwar glut push world oil prices down and, as the price falls, slap on an oil-consumption tax. The bigger the fall, the bigger the tax. If the glut produces, say, a $10 drop in prices (from $20), slap on a $10 oil tax.
That way the consumer still pays $20 per barrel. This keeps him and the country from reverting to the ruinous energy profligacy of old. But instead of the full $20 going to OPEC, as it does under the price-fixers' solution 1, only $10 goes to OPEC. The other $10 goes to the U.S. Treasury.
The tax on imported oil alone would yield $80 million a day. That is $80 million that can be used to reduce the deficit or raise teachers' salaries or cut marginal income taxes or create incentives for domestic oil production.
(If domestic producers needed, say, $15 oil to keep most of their marginal wells in production, the Treasury could fully guarantee that price using only about a quarter of total oil tax revenues.)
Moreover, the $80 million a day amounts to $30 billion a year off the U. S. trade deficit, 60 percent of which is accounted for by imported oil alone.
We know that President Bush has - or had - an allergy to taxes. But encouraging OPEC to cut production to keep prices artificially high is also to tax American oil consumers - except that this hidden tax is paid to the Saudi (and Iranian and Libyan, etc.) treasury. It bequeaths all postwar oil windfalls to OPEC and Co.
An upfront U.S. oil tax tacked on to cheap oil, on the other hand, would funnel the full benefit back into the American economy.
For an oil-consuming country like ours, nothing -nothing - is better than low oil prices. There are potentially harmful side effects, but they are fully preventable with a compensatory tax. This proposition is so simple a child can see it. Only the experts can't.