The Right Time to Reform Fuel Pricing
Should we want oil prices to go up, because that will discourage oil consumption, or down because that will discourage oil production? In fact, countries should seek both outcomes: Lower the price paid to oil producers and raise the price paid by oil consumers, by cutting subsidies for oil products or raising taxes on them.
CAMBRIDGE – World oil prices, which have been highly volatile during the last decade, have fallen more than 50% over the past year. The economic effects have been negative overall for oil-exporting countries, and positive for oil-importing countries. But what about effects that are not directly economic? If we care about environmental and other externalities, should we want oil prices to go up, because that will discourage oil consumption, or down because that will discourage oil production?
The answer is that countries should seek to do both: Lower the price paid to oil producers and raise the price paid by oil consumers, by cutting subsidies for oil and refined products or raising taxes on them. Many emerging-market countries have taken advantage of falling oil prices to implement such reforms. The United States, which is now surprisingly close to energy self-sufficiency, so that the macroeconomic effects roughly balance, should follow suit.
Consider this: America’s roads and bridges are crumbling, and the national transportation infrastructure requires investment and maintenance. And yet the US Congress shamefully continues to evade its responsibility to fund the Federal Highway Trust Fund and put it on a sound long-term basis, owing to disagreement over how to pay for it. The obvious solution, which economists have long advocated, is an increase in America’s gasoline taxes. The federal gas tax has been stuck at 18.4 cents a gallon since 1993, the lowest among advanced countries. And yet, on July 30, Congress adopted only a three-month stopgap measure, kicking the gas can down the road for the 35th time since 2009.
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