A Proposed Petroleum Fuel Price Stabilization Plan

Abstract

The high level of petroleum consumption in the United States contributes to environmental harms, burdens national security, and increases urban sprawl and traffic congestion. In response, the Obama administration has proposed targeted subsidies and regulatory mandates. We do not believe this will be an effective strategy because Congress has no comparative advantage in picking technological winners and losers. Among serious policy analysts, there is consensus that the best approach is to increase prices through a gas tax. The problem, however, is intense and widespread public opposition to this approach.

We propose an alternative that offers many important benefits of a gas tax but is more politically palatable, and also will not reduce aggregate consumer demand: a revenue-neutral petroleum fuel price stabilization plan (the “PFPS”). The essential idea is to set a floor under the price of gasoline. If the market price falls below this threshold, then consumers would pay an additional levy on petroleum fuels to make up the difference. For example, suppose the PFSP sets a floor of $3.50 per gallon. If the price would otherwise fall to $3.00, the PFPS contribution would raise the price by 50 cents. But if the market price rises to $3.75, the levy would be zero. Our goal is not to collect revenue, but to influence behavior. Accordingly, we propose that any revenues collected be fully refunded to consumers pro rata. While consumers as a group would experience no net decline in purchasing power, individuals would, of course, be affected: those who consume less than the average amount of gasoline would enjoy a net benefit, while those who consume more would incur a net cost. Thus, the PFPS would create a systematic long-term incentive to reduce petroleum fuel consumption with a neutral fiscal impact.

Our proposal would signal to consumers, auto manufacturers, and investors in alternative energy technology that petroleum fuel prices will not decline below the floor price in the future. Armed with this information, consumers, manufacturers and energy investors would commit to making fundamental changes in their behavior and their investments in new technology – without need of targeted government subsidies – because they would know that their investments would not be undermined by a future collapse in petroleum prices. Such assurances are crucial, as recent events have shown. Without a stabilization program, the wild fluctuation in oil prices in 2008 will leave investors and consumers all the more wary of investing in energy efficiency. Our proposal also has significant political advantages. The fact that it is refundable means that those who consume the average amount of petroleum or less will make net profit from the program, and thus will become a constituency for it. Moreover, if the floor on gas prices is set below the level of gas prices when the program is enacted – something that is easy to do when prices are high – then voters could take comfort in the fact that they would never have to make any payments under the program as long as oil prices do not decline. Of course, if the price floor is set at a low level, the program would have less impact. This is apt to be the case if the plan is adopted at a time when gas prices are low, and the price floor is kept at a level below the market price. In response, a range of adjustments to our proposal are possible.