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As Oil Ebbs
The nation still needs a sane energy policy.

Monday, October 9, 2006

THE DECLINE in the price of oil from its July peak of $78 per barrel has prompted relieved sighs among policymakers. Just a few months ago there were fears that expensive oil could simultaneously slow growth and stoke inflation, resulting in the vexatious problem known as stagflation. Today, cheaper fuel is rescuing consumers from at least part of the impact of falling home prices. Oil at around $60 per barrel is one reason the Dow Jones industrial average recently broke its record.

The relief should not distract from the central policy fact about oil, which is that government must do more to discourage consumption. The past year or so has vividly demonstrated the connection between surging oil demand and high prices on the one hand and noxious political trends on the other. High energy prices pumped money into the coffers of oil exporters such as Venezuela, Iran and Russia, emboldening their leaders to challenge the interests and values of the rich oil-importing democracies. Back in the 1990s, Russia depended on Western capital and made progress in embracing Western democratic values. In this decade, by contrast, the boom in oil and natural gas prices has left Russia with a surplus of capital. Freed of any need to humor Western creditors, Russia's leaders have hobbled democratic institutions at home and bullied democratic neighbors abroad.

Deflating petro-bullies is one good reason for the United States to reduce oil consumption and so bring oil prices down. Another reason is to reduce global warming, the evidence for which continues to strengthen. Again, the past year or so has provided a revealing natural experiment: High prices began to curb sales of gas-guzzling sport-utility vehicles and generated a flood of venture capital investment into alternative fuels such as ethanol made out of agricultural waste or grass. But with oil prices now down a bit, the commercial momentum behind energy conservation and alternative fuels may dissipate.

The policy challenge can be summed up this way: How do you keep oil prices low so as to deflate petro-bullies but simultaneously high so as to stimulate alternative fuels? The answer is taxation, which could mean specific levies on gasoline and other products or a more general carbon tax. Taxation would prompt cuts in consumption, which would lower the pretax price at which petro-bullies sell crude oil. Taxation would simultaneously boost the incentive for carmakers and venture capitalists to pursue energy conservation and alternative fuels.

The chief objection to this policy is that a new tax would burden the economy. But any such burden could be offset by reducing some other tax. The secondary objection is that a carbon tax is politically unfeasible. But the defeat of President Bill Clinton's proposal for a BTU tax, commonly cited as proof that a carbon tax is unthinkable, took place more than a decade ago. That was before oil states' extremism emerged as a leading security threat. It was before the evidence on climate change became overwhelming. It's time for the nation's political leaders to get beyond the circular conviction that they can't propose a carbon tax because nobody is proposing a carbon tax. What sort of leadership is that?

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