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THE ECONOMY January 2, 2012
Is everyone ready for a double dip recession? It is coming, unfortunately. Wall Street is doing great because they have their costs down and have not hired large numbers of people and sales are good. But problems are lurking everywhere and quantifying the adverse effect is next to impossible. Housing prices will be lowering in most areas of the country and defaults should also increase. Commodity prices and especially oil prices are rising which will increase inflation at the worst possible time. While that is bad for us, it is worse for underdeveloped countries across the world which could cause political unrest. Egypt may be the first of many countries to have major uprisings.
It is time to hunker down for dark days ahead.
OIL
Oh that wonderful imported oil. Dont you love it. And our geniuses in government has absolutely no clue how to break the hold that the Middle-East has over us.
Gas prices in the US are low compared to Europe and most of the world because the American consumer likes low priced gas so we can inexpensively fill up our gas guzzling cars. Well, you know what? This is not 1960. We are NOT oil-independent and have not been for years and it will get worse in the future. This means we will rely more heavily on our unreliable foreign sources. We will be having more whip-lashing of prices up and down with the general trend being up. So if we know it will be higher in the future, and we hate the up and down spikes in the price of oil, and we know that we should be driving more fuel efficient cars, why dont we take an action that will solve all of these problems and more with a very simple but seemingly distasteful pill.
The plan.....
Energy independence is our objective right? Brazil accomplished it. Are we not as smart as them? We can blow their doors off. We want to make it more attractive to produce energy inside the US. Lets say that right now oil is at $65/bbl and we expect it to be $125 in 3 years. The price certainly will fluctuate wildly over the next 3 years but we, the United States of America can create a gradual increase through the Miller Plan.
Since we expect about a $20 increase per year, here is what we do. We begin to place a tax on imported oil that would increase to $20 by the end of year one (equivalent of $85/bbl), $40 by the end of year 2 ($105/bbl) and $60/bbl by the end of year 3 ($125/bbl). So what does this do?
Oil Companies - Companies with primarily foreign production will be at a competitive disadvantage to bring oil into the country. So they will sell more oil to foreign countries. Companies with significant domestic production will be at a competitive advantage with no tax on them. They will make gobs of money and will be fighting for more domestic, highly profitable sources. Production of oil from oil shale will become more profitable since there will be no tax on domestic and possibly Canadian production.
Alternate Sources - will be competing against higher cost imported oil and therefore since they know they will not be undercut by Saudi Arabia. Our Alternate Source suppliers will know what the competitors price will be for the next 3 years and beyond and therefore, they will be much more willing to invest heavily in their new technologies.
US Consumers - They know what they will be paying at the pump for the next decade, so there will be no excuse for not buying something that is going to be economical today as well as 4 years from now. The consumer can count on what they will be paying at the pump so there will be no personal disasters from sharply higher prices like we saw last year ($4.11 /gal).
US Business - If you know what your energy costs will be with certainty, you will be more able to invest in facilities and equipment. Take away the uncertainty of energy prices and suddenly you can invest with more confidence.
US Government - Using the tax revenue for financing the development of domestic energy sources could be key to us becoming energy independent if we approach it like we approached our race to put a man on the moon. Excess revenue from this program should go to shore up our underfunded programs that are heading toward bankruptcy like Social Security or Medicare.
If we import 5 MBBl per day, times $20/bbl, that is $100 million per day or $3 billion per month or $36 billion per year.
We start a program of raising gas taxes so that in 3-4 years gas will be around $4.00 a gallon and then go up gradually from there. Here are some theoretical target gas prices. 2010 - $2.75, 2011 - $3.00, 2012 - $3.50, 2013 - $4.00. Here is the beauty of the plan. These are target prices that would be achieved by adjusting the taxes to achieve these targets. If oil prices drop next year so that gas would cost $2.00, the tax would be $.75 so the target of $2.75 would be hit. These taxes could be earmarked to shore up our worsening Social Security or Medicare reserves or one of our other worsening programs. Lets say that oil spikes in 2011 due to an improved economy and lets say there is some political upheaval in the middle-east. Because of this, the normal price of gas would be $2.90 and the tax would be reduced to $.10 from $.75, thus keeping the price at the pump at $3.00 which is the target price. If the normal gas price goes to 3.70 in 2012, the gas tax would be $.00.
So every time the normal gas price dips below the target, our financial reserves are built up. Everybody knows what the minimum gas price will be for the next 4 years and therefore you make your car buying decision based on where you KNOW the gas prices are. No more whip-lash where you long for a fuel efficient car when prices are high and you want your gas guzzler when prices are low.
January 2, 2012
