Wednesday, February 27, 2008

Oil's Obvious Solution: Why Isn't it More Noticed?

First, an administrative note: I was so busy with homework that I couldn't do any more of the planned series on the nominees, and now that McCain has wrapped up the Republican nomination further comment on the Republican race is pretty pointless. Later posts will probably tell readers (if there are any at this point) what I think of Hillary, Obama, and McCain, so I'm calling off the series.

Anyway, this post came together for me while I was strolling through Captain Ed's comment section. Having corrected the misconception that Clinton performed an economic miracle (for those who are interested in that discussion,
here is the relevant post), I moved on and noticed a post complaining that Exxon pays taxes for a lot of the poor population. This piqued my interest, and while replying my thoughts coalesced into something worthy of a blog post. Here we go:

Oil, as much as food, is a necessity; our nation runs on the stuff. But high gasoline prices have inspired widespread complaints about the evil oil companies who make ungodly profits at the taxpayer's expense. Furthermore, oil's role in carbon dioxide emissions, its limited nature, and its disreputable provider nations (particularly in the Middle East) combine to make it that much more objectionable. Whether or not you believe that oil companies make too much money or that CO2-created AGW exists, oil is not an ideal energy source by any stretch of the imagination, certainly not as THE resource of the United States.

So, what to do about Texas tea? Motivated by dislike verging on hatred for oil companies as well as global warming, the left offers various solutions, which for the sake of simplicity I will divide into two categories: carbon taxes and cap-and-trade systems. As the name indicates, carbon taxes generally tax the hell out of everything that emits a greenhouse gas, including (and probably especially) products that use oil as well as oil companies. The rationale is that creating an economic disincentive will encourage companies to search for other energy sources, plus Congress gets more money (which is a good thing for Congressmen, if not for the rest of the country). Cap-and-trade systems set a limit on the amount that the country can emit, divide up that amount into small units, and hand those units out to companies to sell back and forth until everything balances out.
Proponents of this system argue that it sets a clear limit on emissions (as opposed to the gas tax); that it is something of a "free-market" solution that allows companies flexibility in determining their emission rates; that it has been tested successfully on sulfur dioxide emissions, reducing acid rain without a lot of hullabaloo; and that Congress gets money from it (of course). Meanwhile, the Republicans offer the tried-and-true solution of leaving it to Smith's invisible handmobile. Some Republicans simply don't see this as an issue - they don't think AGW is real and don't fault oil companies for making a profit. Others trust that the free market will sort things out - if the oil companies are so eeevil and oil kills babies, surely someone will notice after a while.

However, none of these stock solutions mix well with oil because of the nature of the industry. Carbon taxes are essentially gasoline taxes applied on a broader scale - but the net result would simply be higher prices. Since oil is a necessity, oil companies have a lot more leeway in their pricing than most - they can adjust prices to meet their desired profit margin, and the only real loser in this situation is the consumer. More specifically, the loser is the poor consumer - since taxes on oil companies translate into higher prices at the pump, a carbon tax is essentially the same as the regressive sales tax for oil companies. We can see this in a smaller frame by looking at gasoline taxes, which don't put people off buying gasoline and don't stop companies from making large profits. So that solution doesn't hold up.

Cap-and-trade is more complicated, but still ultimately fails when it comes to controlling oil companies. First, the initial handout of permits is a process seemingly ripe for corruption and havoc, unless there's already a good way to control that process. Assuming the acid rain politicians figured that out, we then move to the effect on oil companies, which is essentially nil as they can purchase permits willy-nilly unless and until the market freezes up as companies attempt to hold on to their remaining credits, which basically destroys the system. And the cost for those permits will once again go straight to the taxpayer.

Finally, the free-market solution will fail (or at least be EXTREMELY slow) because of the dominance of oil. Until a development like the one that allowed us to exploit oil comes along, oil is the best natural resource available. There's technology that allows us to use other resources for the same process, but those are very slow to come together because there's little short-term incentive at the moment to develop it; furthermore, any resource that requires a surrounding infrastructure (like gasoline) will have trouble competing against the well-developed infrastructure that supports oil.

To reuse the chemistry metaphor, the unifying quality of these solutions is that they are polar; they're each developed by one side of the political continuum. Oil, being a nonpolar substance, can only dissolve nonpolar substances; let's try a nonpolar solution. Promote government R&D that develops an incentive for alternative energy sources. The X-Prize
worked well for private spacecraft development; something similar can be (and probably is being) done for alternatives to oil in various industries. Using the X-prize model, the left is happy because it helps the environment and hurts the eeeevil oil companies, while the right is happy because it preserves free-market incentives and removes ties with OPEC. Why don't more people talk about this? Is it because it's already done to the degree where more won't help?

Another simple solution, which I was reminded of by a friend: nuclear energy. Apart from the stigma of Chernobyl and the problem of getting rid of nuclear waste (both solvable), is there any reason why we aren't putting more effort into this area?