Friday, May 12, 2006

A price floor for Oil?

Here's an interesting idea from the Brookings Institution's Philip Gordon, in today's Financial Times:
Instead of supporting politically cynical palliatives, Mr Bush should take the opportunity created by high oil prices to ask Congress to impose a "price floor" on a barrel of oil. The mechanism would be very simple. The government would announce that, as part of a comprehensive energy strategy, it will henceforth not allow the price of oil to fall below a particular floor of, say, $60 per barrel. If high oil prices continue, the proposal would have little impact and cost nothing, either politically or financially.
But if prices fall below that level – as they might well do once the impact of recent prices on demand and investment in alternative energy sources work their way through the world economy – the government would intervene to keep the price stable, with the difference between the floor and the market price reverting to the state as revenue.
If consumers and industry knew that the price of a barrel of oil would never again fall below $60 per barrel – the level around which US-produced corn-based ethanol fuel becomes economically viable – they could make long-term investment and consumption decisions in a way that makes little economic sense so long as price stability is not guaranteed. Americans will not take long-term decisions to buy fuel-efficient automobiles, create distribution networks for alternative fuels, or invest in technologies such as hydrogen fuel cells, flex-fuel vehicles or wind power unless they know that a future sharp fall in oil prices will not undercut them.
To make the proposal even more palatable politically, Washington could promise to spend any revenue on education, healthcare, homeland security and even tax cuts rather than use it for deficit reduction, a noble purpose but one that rarely excites voters. Senator Richard Lugar, an influential leader in the energy policy debate, has already come out in favour of a modest, revenue-neutral oil price floor.
Imposing such a "price floor" seems like a good idea, as it would also eliminate the oil-powers' ability of destroying the nascent alternative energy industry (nuclear, ethanol, oil shale etc.), as they did in the eighties, by flooding the oil market (and thereby slashing the price of oil), which they would no doubt love to do (assuming they still have the leverage to) as soon as enough money and resources have been invested in such projects. Also see an excellent related article in this month's Reason Magazine.

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