Monday, June 23, 2008

Oil!



The most usual response to expensive oil is to blame this on nefarious speculators. This might be political expedient. As Paul Krugman writes
Mr. McCain tried to touch all the bases. He talked about conservation. He denounced the evils of speculation: “While a few reckless speculators are counting their paper profits, most Americans are coming up on the short end.” A weird aspect of the current energy debate, incidentally, is the fact that many of the same market-worshipping conservatives who first denied that there was a dot-com bubble, then denied that there was a housing bubble, are utterly convinced that nasty speculators are responsible for high oil prices.

Now Obama is adopting the same message.
The only problem with this is that there's no evidence that there's an oil bubble, and that rising oil prices are probably very much demand-based.
So, how can we explain this in a way that might not be politically self-defeating? Peter Dorman has a cogent economic explanation that just might be on the right track.
So what’s the alternative? The problem is not that oil is expensive, since burning it is truly costly for the human race, whether we pay the monetary price or not. The problem is that the money ends up in the hands of governments and oil companies that get rich simply because they’ve captured the resource. In economic terms, it’s the problem of rents: vast sums of money are being transferred from us, the consumers, to those who control a commodity in high demand but limited supply. And the solution is to get the money back. This is another reason why we need a cap-and-rebate plan for carbon. Put a tight cap on carbon fuels. Auction all the permits. Give the money back to the people. By drastically lowering demand we also put a lid on the price of oil at the wellhead. In other words, rather than paying lots of money to Exxon and the Saudi royal family, we pay it back to ourselves. Either way, oil will be expensive, because it has to be. But the solution is to get the money back, so we can protect our standard of living in other ways that won’t imperil the planet.

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