That Slippery Old ‘Oil Tax’

Watching the House and Senate quarrel over which favored users and which alternative suppliers will get new subsidies and tax breaks in the energy bill ought to be a hair-tearing experience for anyone with a basic understanding of economics.

But at the Bush White House -- where they care more for business than for capitalism -- the only frustration is that all this is distracting from the important work of enacting new tax breaks for the traditional oil industry.

Three years ago, the price of crude oil was about $27 a barrel. On Friday, it was about $57 a barrel. The United States imports about 12 million barrels a day. Do the math. A $30-a-barrel price hike adds up to $360 million a day, or $131 billion annually. That’s just the extra amount we’re sending abroad because of recent years’ increases. The administration has no problem in calling this an “oil tax” when it is trying to explain the middling performance of the economy. “Not our fault, folks. Forces beyond our control.”

But this is not your ordinary tax, for a couple of reasons. First, the revenue from an ordinary tax goes into the U.S. Treasury, where there is at least a chance that it will be used in ways that benefit millions of Americans. The revenue from this tax goes to the treasury in places such as Saudi Arabia, where it will support the decadent lifestyles of a few hundred princes.

Second, the United States actually consumes not 12 million but 20 million barrels of oil a day. The other 8 million barrels come from domestic oil extraction. I say extraction rather than production because oil “producers” don’t actually produce any oil. They just pump it from the ground. That can be difficult, costly and even dangerous work, and I don’t mean to demean it. But drilling and extraction are only a small part of the current $57 cost of a barrel of oil.

In the case of OPEC members, the cost of extraction is infinitesimal. Yet they can extract $57 a barrel from the rest of the world for other reasons, including some that are definitely not beyond their control.

Domestic “producers” have higher costs. But they were profitably pumping away in 2002, when the price was $27 a barrel. Now that oil goes for $57 a barrel, most of the difference must be profit. Eight million barrels a day at $30 a barrel works out to $87billion a year. If the extra $131 billion we pay to foreigners is a tax, so is the extra $87 billion we pay to the domestic oil industry. And if that $87 billion is a tax when collected from consumers, it is in effect a subsidy when pocketed by domestic oil extractors.

And the tax and spend doesn’t stop there. When oil prices go up, other forms of energy go up too. This includes alternative energy sources such as windmills, cow exhaust, whatever. They all benefit from a subsidy of $30-a-barrel-equivalent, financed by the “tax” on energy consumers of an equal amount.

So it is odd, from an economic point of view (though less so from a political one), that the energy bill debate should be over who will get even more subsidies. What we should want is more energy taxes, not subsidies. This has been a theme of those irritating people, “thoughtful moderates,” since at least the forgotten John Anderson presidential campaign of 1980.

The centerpiece of that campaign was a 50-cent-a-gallon gasoline tax, which would have been “rebated” by a drastic reduction in the Social Security tax. The idea was not to raise revenue, but to affect behavior. That is still the right approach, though hopeless in today’s political culture. The way to get people to use less energy is to make using energy more expensive. People can then adjust in an infinite variety of ways. (And, once again, you can give the money back in other ways.) Why should you care whether someone saves energy by not buying an SUV, or by buying it and driving it less? A so-called BTU tax, which taxes all energy sources equally, would be even better than a gasoline tax, but that plummets us way too deeply into policy wonkery.

The point is that we are already paying this tax, only the money is going to foreign countries and to George W. Bush’s petro-pals. As it happens, the price of gasoline has gone up just about 50 cents a gallon since 2002. That’s a lot less in real terms than 50 cents was back in 1980. But still: What if a visionary president and Congress had slapped on a 50-cent tax in 2002? That might well have reduced demand, and impressed a jittery world, enough that gas prices today would be lower than they are even including the tax.

It’s called market forces. These Republicans ought to read up on it.