To curb demand for oil, add a tax when prices tank

Low gasoline prices, welcome relief to consumers and businesses, unfortunately also have a down side: They remove much of the incentive to wean ourselves off our costly dependence on oil.

The costs of our oil dependence are obvious when the price soars, as it did this past summer. Not only does it hit us hard in the wallet, but even at just $100 a barrel, we send more than $1 billion dollars per day abroad, some of it to countries and regimes whose interests are hostile to our own.

Even when the price of oil is low, the costs of our dependence mount in the form of the emission of vast amounts of carbon dioxide from burning petroleum products. And whether prices were low or high, our dependence on oil has contributed to our deep and costly involvement in the Persian Gulf and other oil producing regions.

This year’s high gasoline prices at least had the positive effect of encouraging us to use less oil, for example, by driving less and buying more fuel-efficient vehicles. They also created a more favorable climate for companies considering investments in electric cars and alternative fuels.

In contrast, removing that incentive will encourage us to put off making changes, with predictable consequences. Once the economy recovers, oil and gasoline prices will inevitably rise, and the boom-bust cycle will repeat itself.

What is to be done? As economists have long recognized, the most economically efficient way to alter the behavior of consumers — to use less oil — and businesses — to develop products that allow consumers to use less oil — is to raise the cost. And if the market can’t be counted on to send reliable price signals, then a tax can be used to ensure that the cost remains high enough to encourage the desired behavior.

To be effective, a tax on oil need not be applied all the time, however. It need only be imposed when the price falls below a desired threshold. In other words, it can take the form of a price floor.

In addition, a sufficiently high price floor need not be introduced all at once. All that businesses and consumers need is the certainty that prices will eventually reach a level at which producing and buying more efficient vehicles and alternative fuels will make economic sense. Thus an effective price floor could be introduced gradually, say over a period of 10 years.

Exactly how high a price floor is needed is a matter for economists to determine. But for the sake of argument, we might consider raising the minimum price of a barrel of oil by $10 per year, so that it reaches about $150 a barrel by 2019. This would translate very roughly into $4.50 per gallon of gasoline.

Although no one wants to pay higher prices, a rising price floor would give consumers and businesses ample time and incentive to make the adjustments necessary to survive and even thrive in a high price environment. A further advantage is that, whenever the tax kicked in, a greater percentage of the money we spend on gasoline would remain in the United States.

Yet any proceeds need not simply go toward filling the government’s coffers. A price floor could be revenue neutral, with the proceeds being used to help those hurt most by higher oil prices.

During the presidential campaign, Barack Obama described America’s dependence on oil as one of the greatest challenges that the country has ever faced, and he offered an energy plan that contained a number of measures for reducing U.S. oil dependence over 10 years.

Conspicuously absent from this plan, however, was any kind of oil tax. If the new administration is truly concerned about reducing U.S. oil dependence, it should give serious consideration to introducing a rising price floor on oil as part of a comprehensive effort to achieve this worthy goal.

• John S. Duffield is a professor of political science at Georgia State University and author most recently of “Over a Barrel: The Costs of U.S. Foreign Oil Dependence.”