Thursday, December 18, 2008

Energy Policy in China and the United States

China has been aggressively structuring deals to secure crude supply directly with OPEC member states and non- OPEC producers. Here are a few examples of deals that have been struck recently: In January, a $2 billion Kazakh oil field. Recently offering a $10 billion loan to Brazil to aid exploration. And, finally, working with Angola to cooperatively build infrastructure. Similar to ABC's 1980's sports tag line -China is "Scouring the Globe to bring you a wide variety of" energy. Additionally, China is raising its fuel tax.

Based on the above information and other similar stories, it is clear that China is aggressively taking steps to compete in a hydrocarbon economy. Is the US? The nation's first Energy Secretary, James Schlesinger, has been quoted as saying: "The United States is capable of only two approaches to its energy policy, 'complacency or crisis." One might note how the sudden drop in pump price makes folks much more willing to buy SUV's and pickup trucks.

Greg Mankiw is a Harvard professor of economics, and was appointed by President Bush to be the the chairman of the Council of Economic Advisers. Professor Mankiw recommends a significant hike to the gas tax - and has written in the Wall Street Journal and the New York Times about this approach. He calls for a significant increase (a dollar or more per gallon), phased in over 10 years. Folks that agree with him are called members of the Pigou Club. There are many respected folks that count themselves in this club - liberals and conservatives alike.

Allow me to articulate the reasoning behind my decision to formally join this club.

1) A gasoline tax is much easier to monitor than CAFE standards or a cap-and-trade carbon system. If we must regulate carbon emissions, this seems to be the "small government" way to do so.

2) A increase in gas tax, coupled with a decrease in personal income tax, effectively becomes a consumption tax. I like consumption taxes - especially in this case - because they directly impact consumption. When we inhibit consumption, we depress prices - and decrease the amount we are sending to OPEC member nations. Allow me to write this again differently - we can pay ourselves through a tax, or we can pay OPEC through increased commodity costs. Repatriating these funds seems to me to be fundamentally sound for our economy. Let's keep our hydrocarbon dollars here.

3) The market has fallen so far, so fast, we could implement a big gas tax - all at once - without feeling drastic reprocussions. After all, only two months ago the US had retail gasoline prices higher than those that would be the result of such a tax.

I do not like or support the concept of big government. But I do support a domestic energy plan that moderates the two extremes of 'complacency and crisis.'

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