A Better Floor

Does Tom Friedman of the New York Times read my blog? After reading his column on Wednesday (Times Select required) I have to wonder. Last month, he proposed instituting a $45/barrel floor price for crude oil, as a way to stimulate alternative energy investment and reduce US reliance on oil imports, especially from the Middle East. I posted a lengthy critique (1/18/07) of this idea, concluding that it would be too difficult to administer and do little to promote conservation. Now, Mr. Friedman has apparently switched from a floor price for crude oil to a $3.50/gallon floor price for gasoline. Although it would probably be even harder to achieve politically, the latter doesn't have nearly as many drawbacks as a crude price floor, and it would probably contribute more--and more quickly--to our energy security than any other single idea currently under consideration.

Why would a floor price on gasoline work differently from one on crude oil? First and foremost, it would spare US businesses an increase in their energy and raw material costs that their international competitors wouldn't face. It would give consumers an incentive to be more efficient, without disrupting the international markets and flows of oil and its products, which trade on a pre-tax basis and are essential for responding to sudden changes in supply, such as after Hurricane Katrina. In addition, although many different formulations of gasoline are sold across the US, because of differences in local environmental regulations and regional "attainment" status under the Clean Air Act, these distinctions are not nearly as great as those between crude oil grades. Once you set a floor price for conventional unleaded regular gasoline, the market will sort out the relative value of costlier grades and formulations.

Like any idea of this type, a gasoline floor price doesn't lack for complications. For example, how should it apply to imported gasoline--of which we buy more each year--as a tariff, or when it leaves the blender's terminal? Even thornier, should the same floor price apply across the entire US, or should it take into account the differences in regional markets and state taxes? If we were to impose such a tax this week, prices on the East Coast would rise by $1.33/gallon, while those in California would go up by $0.97. Finally, a floor price is still a form of gasoline tax, and just as regressive as a flat per-gallon tax. Buffering its impact on low-income Americans would be tricky, because the level of the tax would vary continuously with fluctuations in the wholesale markets, which reflect crude prices, refining margins and many other factors. Unlike a flat-rate tax, however, it would make consumer fuel prices much more predictable and stable (see Tuesday's posting,) reducing the uncertainty involved in the decision to buy a hybrid or some other fuel-efficient car.

The prerequisite for any substantial new tax on gasoline, however, is the recognition that all of our technology options for improving vehicle efficiency and producing oil substitutes will take more than a decade to reverse the current trend of our oil imports. We would also have to conclude that that timeframe is not adequate--or exceeds our patience--to address the energy security or climate change risks that lead us to want to reduce gasoline consumption in the first place. Combining those realizations would lead us to conclude that we must tackle the consumption of today's entire vehicle fleet. Only then would a gas tax rise to the top of the list of options. Now compare that sequence of events to the current state of play concerning Corporate Average Fuel Economy standards. What external events would we have to see, before Congress and the Administration would be ready to take on something as radical as Mr. Friedman's floor price?