Bookmarked at for 2007-03-05
Berkeley Economic History Seminar: March 5, 2007: The Societas Publicanorum

The Price of Oil in Arabia

Alex Tabarrok writes:

Marginal Revolution: It's quite surprising that the major consumers of the world's oil have not been able to agree to an oil tax under the auspices of something like the Kyoto Protocol. It's surprising because if the major consumers of oil all increased taxes they would end up bearing very little of the burden.

The result is a simple application of the theory of tax incidence. The burden of a tax falls on those who can least afford to escape the tax. The world's demand for oil is inelastic but the supply is even more inelastic. What is Saudi Arabia, for example, going to do with its oil except sell it? The oil is already fetching a price well above cost so if there is a world tax on oil that's like a tax on land - Saudi Arabian land to be precise - and a tax on land is born by land owners not by consumers...

Alex is right. A tax needs to be a general tax on energy that raises the price of energy in order to affect greenhouse gas emissions: a tax on inelastically-supplied energy alone won't do it. That said, a tax on oil is still worth doing: the governments of the energy-using core would make better use of the money than the Al-Saud and As-Sabah families (and, alas! it looks like they would make better use of the money than the governments of Nigeria and Venezuela as well). And there are foreign-policy reasons for lessening our dependence on the Middle East.

Members of the Pigou Club should take note. For the Pigou Club to work to alleviate global warming the Pigouvian tax must reduce the global consumption of oil (not just say US consumption) but with the supply of oil being very inelastic that's not going to happen. A tax could drive high-cost US producers out-of-business but the major world producers are going to keep selling even with a high tax. In other words, membership in the Pigou club has few privileges unless you can put the major producers under (does that advice sound familiar?). If you want to tax Hugo Chavez, however, please do join the Ramsey Club.

Saudi Arabia's oil won't last forever, however...

When the long-run comes, supply will be elastic once again. And the long run does come. Always.