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Tuesday
Oct172017

The 10% Solution 

So, recapping from my last post:

Russia interfered with our 2016 election in a big way and deserves some kind of spanking for that.

Russia’s economy and government are vulnerable to variations in the price of oil.

Given that we use so much of the world’s oil, small variations in our demand can make a big difference in the world oil market, and therefore oil prices. If our demand drops significantly the price of oil drops even more significantly, and Russia essentially goes bankrupt.

My first impractical suggestion was that we all slow down on the highway and cut our oil consumption that way. I have an equally improbable, yet technically feasible suggestion about how we could achieve the same goal. I should note up front that I don’t expect this idea to go anywhere while the present administration is in the White House and former Governor Goodhair of Texas runs the Department of Energy. For that matter, until we get the oil companies backed off from Congress a few paces. Here goes.

This proposal has two inextricably interlocked parts: An efficiency and conservation effort and a strike price tax on imported oil.

First, the strike price tax. It’s an odd tax, in that it isn’t a fixed percentage or a fixed fee per unit of taxed stuff. It is a fixed target price. The price of oil in the U.S. (the WTI or West Texas Intermediate) as I write is around $52 per barrel. The international price (Brent) is around $57 per barrel. A strike price tax would establish a target price of, let’s say, $60 per barrel. Right now that would mean a $3 per barrel tax on imported oil. If Brent goes to $56, a $4 tax, and so on. We presently import about 5 million barrels a day (mbpd), so every dollar in tax raises $1.8 billion per year. Such a tax would fix the U.S. domestic price of oil at $60 per barrel as long as we import any significant amount. The jump from $52 to $60 would add about 13 cents to a gallon of gasoline. Not wonderful, not catastrophic. The beauty of this tax is that we could set it at the price of oil at the time of introduction and American consumers would see no price difference at the pump.

Second, start a publicly announced effort to reduce our national oil consumption by 10%. Just 10% to start, but with intimations that if this worked out well we would keep going to 15% or even 20%. This would be financed by the strike price tax on imports. That initial $3 per barrel would get us $5.4 billion annually to start with.

The money would go to all the things you might imagine: sealing and insulating houses, office buildings, and factories (oil heated ones), upgrading heating systems, giving incentives for more efficient building methods, public transportation improvements, incentives for gas mileage improvements in vehicles, infrastructure assistance for states and cities, and so on. Whatever works. 10% wouldn’t really be a stretch, especially when one considers that an average European uses 40% less energy than an average American.

Even before we hit the 10% mark, world oil markets would react. We would be proposing the removal of about 2.5% of world oil demand when a less than 1% glut dropped the price of oil into the $25 - $30 range just over a year ago. I’m sure the Brent price would drop $5 just on the announcement. That’s another $9 billion a year for us to work with.

So what is the fallout from a program like this? Going back to the primary motivation, Russia would be in trouble.

In direct terms, oil and gas production is 16% of Russian GDP. According to a study by the Carnegie Moscow Center, when we calculate the indirect money flows generated by Russian oil and gas, it’s really more like 60-70% of GDP. It accounts for 50-60% of Russian government revenue and over 50% of exports. If the Brent price dropped by half, Russia would suffer an across the board revenue loss of 25%. It would be just punishment with essentially nothing that the Russians could do about it. Vladimir Putin would be busy struggling for political survival and Russian focus would have to turn inward.

The Persian Gulf monarchies would also suffer. Their cost of production is generally below $10 per barrel, so they would still make money. Their princes would have to buy gold *plated* objet d’art instead of solid gold and distribute more to the general population. They also might find it harder to come up with under-the-table protection money for all those jihadists.

Our European allies with diversified economies would enjoy some price relief, as would any non-oil based economies.

Here in the U.S., the price of oil would be high enough to maintain domestic production. Perversely, oil exporting countries would be tempted to increase production to make up for per-barrel losses, exacerbating their problem. The domestic price of oil would also be stable so that individuals, institutions, and businesses could invest in efficiency improvements with the expectation of a return on investment. Maintaining the price of oil would also prevent people from rushing out to buy giant urban assault vehicles.

It would be a massive job creation program. Energy efficiency is labor intensive. It requires individualized site analysis and design, and real people in person doing renovations. The insulation, sealants, large appliances, and construction materials tend to be domestically produced. Investing $10 billion a year into energy efficiency will create far more jobs than dumping the same money into refining and distributing foreign oil.

It would reduce U.S. health care costs. 10% less oil burned means 10% less emissions from oil products. We could see near instantaneous reductions is rates of asthma and long term reductions in lung and heart disease.

So much winning. So much Russian dismay. So much resistance from Exxon-Mobil. Any policy like this is on the other side of a political turnaround. Still, we need to do more than oppose the present stupidity; we need to propose new ideas.

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