OPEC and Pigou
The members of OPEC are having a spat over whether to further cut oil supplies as we head into Q1 of 2007. Although the technicalities of maintaining the monopoly price are worthwhile (is it best to watch crude prices or accumulated inventories), I am more interested in the Pigovian effects of the Monopoly.
Arthur Cecil Pigou is the father of Welfare Economices. Pigovian Taxes, named in his honor, are taxes used to correct negative externalities. The classic examples are taxing pollution, cigs and alchohol.
The current US tax on gasoline is an example of such a tax; as I have argued previously, gasoline taxes should be increased (while simultaneously decreasing income taxes) in order to better account for negative externalities and improve the incentive structure of our tax code. Environmentalists love this idea, but I think Foreign Policy is a less appreciated and more powerful argument for increasing such taxes.
The OPEC cartel already helps us with the environmental side; by increasing the price of gasoline, the cartel is better aligning the costs of pollution with its consequences. The main difference is that Pigovian taxes usually help pay for the ill-effects, whereas the Cartel price goes to funding radicalism in Latin America and the Middle East, and potentially perpetuating corruption in all of the countries.
Raising taxes on oil in the US will increase its price and decrease its demand, which has the same effect domestically as the monopolist price, except that the US government keeps the prize.
People fail to appreciate the sort of Buyer Power the US has in the world oil market. We consume roughly 25% of world oil. OPEC controls only 30% of world production. The cartel has the upper hand since we have no substitutes for oil and their people already live in the economic equivalent of the middle ages, however, there is room to push back.
The more interesting question is how much Western Oil Companies lobby to maintain the status quo. Although people (including myself) always point to OPEC as the cause for the monopoly prices, it's important to realize that the Western Oil Companies piggy-back on their efforts and also enjoy the monopoly price. In other words, foreign countries have done what Exxon, BP, etc. would love to do at home if it weren't for anti-trust laws. (This reminds me of how sugar producers have lobbied for import quotas on cane sugar, which leads to both a subsidy for their US production as well as higher prices for the sugar plants they control in the Carribean). Does the lobbying power of Big Oil help explain the low US oil taxes?
It's time policy makers start to seriously discuss the problems with our "Addiction to Oil" and analyze why we do so little about it.
Posted by Peter
Arthur Cecil Pigou is the father of Welfare Economices. Pigovian Taxes, named in his honor, are taxes used to correct negative externalities. The classic examples are taxing pollution, cigs and alchohol.
The current US tax on gasoline is an example of such a tax; as I have argued previously, gasoline taxes should be increased (while simultaneously decreasing income taxes) in order to better account for negative externalities and improve the incentive structure of our tax code. Environmentalists love this idea, but I think Foreign Policy is a less appreciated and more powerful argument for increasing such taxes.
The OPEC cartel already helps us with the environmental side; by increasing the price of gasoline, the cartel is better aligning the costs of pollution with its consequences. The main difference is that Pigovian taxes usually help pay for the ill-effects, whereas the Cartel price goes to funding radicalism in Latin America and the Middle East, and potentially perpetuating corruption in all of the countries.
Raising taxes on oil in the US will increase its price and decrease its demand, which has the same effect domestically as the monopolist price, except that the US government keeps the prize.
People fail to appreciate the sort of Buyer Power the US has in the world oil market. We consume roughly 25% of world oil. OPEC controls only 30% of world production. The cartel has the upper hand since we have no substitutes for oil and their people already live in the economic equivalent of the middle ages, however, there is room to push back.
The more interesting question is how much Western Oil Companies lobby to maintain the status quo. Although people (including myself) always point to OPEC as the cause for the monopoly prices, it's important to realize that the Western Oil Companies piggy-back on their efforts and also enjoy the monopoly price. In other words, foreign countries have done what Exxon, BP, etc. would love to do at home if it weren't for anti-trust laws. (This reminds me of how sugar producers have lobbied for import quotas on cane sugar, which leads to both a subsidy for their US production as well as higher prices for the sugar plants they control in the Carribean). Does the lobbying power of Big Oil help explain the low US oil taxes?
It's time policy makers start to seriously discuss the problems with our "Addiction to Oil" and analyze why we do so little about it.
Posted by Peter
posted by PWN at 2:36 PM
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