The Happy Arab News Service

Friday, January 9, 2009

24 > 13

We underestimate our power. Of course, the slump in China and other rapidly growing economies has contributed to the current extreme price collapse. But China consumes only 9 percent of the world's oil. The United States consumes 24 percent. On the other hand, Saudi Arabia produces 13 percent of the world's oil. We don't generally see ourselves as the Saudi Arabia of oil consumers, but we are.

Source: The Net-Zero Gas Tax
A once-in-a-generation chance.
BY Charles Krauthammer

The US almost twice as much a swing consumer of oil as the Saudis are a swing producer - 24 percent of the market vs 13 percent, of course it's still much easier for the Saudis to cut supplies than for the US to control its demand. However, this also means that to counteract a 10% decline in demand in the US the Saudis have to cut twice as much in supplies. OPEC has never excelled in self discipline of its members and the implicit Saudi threat to open the floodgates and flood the market with cheap Saudi oil is as much responsible for OPEC's existence as the self interest of its other members. In fact, OPEC controls only a section of the global oil supplies, about 1/3. There are enough producers in the world all too eager to take advantage of OPEC's production cuts. This makes the organization's control of the market a limited one. In fact, it can be said that OPEC's control is determined very much by a degree to which the US is willing to cede this control to external producers. There is very little OPEC can do against a deliberate effort on the part of the US to cool down its appetite for carbon fuels.

As I've already explained here a tax swap (introduction of a gas tax in exchange for equal cutting in payroll or some other taxes) amounts to cutting taxes. Those unconvinced can read this. However the US being a swing consumer introduces an additional dimension to such a tax swap since any significant reduction of the US demand for oil is prone to sending the prices tumbling down so the taxpayers are likely to benefit twice from such a tax swap. First, because a gas tax can be avoided by taking very simple measures such as driving less as well as by long term strategies such as switching to hybrids or using increased ethanol blends. But as they are doing this, the consumers are shrinking the demand for oil increasing the pressure on the price to fall. And so here they are creating another opportunity for themselves to benefit from a tax swap, this time because a tax swap is bound to exercise a downward pressure on the price of oil.

Here it should be very apt to point out to a big difference between trying to replace carbon fuels with cheaper alternatives such as subsidized ethanol and pushing oil out of the market by pricing it out using fuel taxes. Technically speaking and contrary to the idea many people have of the matter, there are no two separate markets - one for oil and another for alternative energies. There is basically only one market - the energy market. In this sense it's pretty much irrelevant what part of this market is getting subsidies or tax breaks, you end up inflating the market as a whole. As long as oil producers can lower their prices in line with the advance of alternative energies, the price of energy is going down expanding the demand. The US has an insatiable appetite for energy and seems capable of taking in as much oil and other energy as is available. This is really only a matter of price. In this sense, it's not clear how much oil the American ethanol program based on subsidies has succeeded to displace at all. It may well be the case that most of this ethanol has rather added itself to the market instead of actually reducing the consumption of carbon fuels. Such an energy policy is always at risk of turning into another story of a dog who was chasing its own tail.

The situation becomes rather different if instead of subsidies the regulators go on pricing oil out through a series of tax swaps. This would create an opening for ethanol and other alternative energies not by making them cheaper, but by making oil more expensive. Under such conditions even without cheaper alternatives, the demand for oil will be shrinking just because of increased energy conservation. Energy conservation can come in many forms such as less and more prudent driving, driving people and businesses closer to each other (less suburban sprawl for example) and such stuff. If on top of this ethanol and others move in, they will have a very concentrated and powerful impact on the market. Every drop of such an unsubsidized ethanol will replace a drop of oil. An ethanol program implemented along these lines may create a total meltdown on energy markets outside the US where Russians, Arabs and others are selling their oil.

In fact, all calculations done until now on how much oil cellulosic and non cellulosic ethanol can displace, and a possible environmental impact of this program on land and water, would be very different if the regulators switch to tax swaps as a primary instrument of their energy policy. Basically biofuels should account for something between 1/4 to 1/3 of the auto fuel market in the US by 2020 and without imports not much more can be achieved in terms of ethanol due to land constraints. However, a gas tax is bound to significantly shrink the overall demand for carbon fuels, or at least keep the demand at bay, and the same amount of ethanol may easily suffice to replace as much as 50-60% of the market. Add to this agricultural subsidies paid to cotton producers and others that can be used to encourage these producers to move to biofuels and the future of oil in the US becomes uncertain.

Of course, the surest way to achieve energy independence, or better independence from oil, would have been for the US to impose a gas tax and open its market for Latin American ethanol. This year for the first time ethanol was outselling gasoline in Brazil and this is despite collapsing oil prices. Brazil has become a leading ethanol exporter, a major world producer second only to the US and not by a wide margin, while its sugar cane plantations supplying local ethanol producers barely account for 1% of the country's arable land. Brazil can easily double and triple its ethanol production and it's by far not the only nation capable of supplying the US market with cheap Latin American ethanol. However, the ethanol program was crafted in such a way that does not allow the US to take advantage of ethanol produced outside the US. And with such a powerful lobby behind the local corn ethanol and Obama about to take office, the chances of a sensible policy change regarding ethanol imports are more remote than ever.

Some people may argue that what I am posting here sounds too good to be true. For these I have the following to say. In the wake of the current crisis many people have been asking themselves how such a crisis could have happened at all. How it's possible that the world's only superpower hosting the best MBA's schools in the world could have produced such a huge amount of economic and business fallacies. The gas tax and its implementation, or better non implementation, is basically the other side of the same story. The only difference between the tax and the crisis is that the crisis has already happened while the gas tax may not happen at all, but in all other respects it's a failure of the same proportions and its causes are the same. Those who find my interpretation of the gas tax too good to comprehend how the tax was allowed to not happen, should ask themselves if the current crisis is not just as bad to comprehend how it was allowed to happen.

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Proclaimed un monstruooo muy monstruoso at 10:17 PM