From: Matthew Welland (matt@essentialgoods.com)
Date: Fri Jan 31 2003 - 06:27:09 MST
On Thursday 30 January 2003 11:06 pm, Lee Corbin wrote:
>
> Welcome!
Thanks!
> > Anyhow, about the price of oil, one big factor in price is taxes. No
> > surprise there. However I suggest that the relationship might be a little
> > different than one might first assume. Huh? Surely if you tax oil, the
> > price goes up. Perhaps, perhaps not. Here is my reasoning:
> >
> > i. Tax oil *at the barrel* (i.e. not at the pump)
> > ii. Prices of oil based products; fuel, plastics, etc. naturally rise.
> > iii. Alternatives to oil-based products appear a little cheaper.
> > I.e. wood or metal instead of plastic, bicycling instead of
> > driving etc.
> > iv. Some consumption shifts away from oil to alternatives
> > v. Demand for oil decreases slightly
> > vi. To maintain revenues, oil producers drop prices a little (*)
> >
> > (*) Of course they could increase prices but remember there
> > really is a free market at work in the oil arena. If one
> > producer increases price they are likely to see market share
> > fall.
>
> That sounds how the equilibrium should work, theoretically.
> One has to ask, why didn't they drop the prices a little to
> begin with, and sell more? The answer should be, "because
> it would have been slightly less profitable."
>
> Okay, so far you have increased the tax on oil, but the
> key has to be in your step (vi). It's not clear that
> the oil producers *can* maintain the same revenue. Consider
> the reductio ad absurdum: if an incredibly heavy tax were
> applied, then production would have to stop altogether.
Pardon my limited education; reductio ad absurdum - take to the extreme?
True, they probably cannot maintain the same level of revenue. I'll try an
explain my thoughts again: Imagine two, competing, oil producers A and B, and
a consumer C. C has added a windfall tax to crude oil imports and over time
consumption of oil has declined slightly. A and B both see revenues decline
in response. Now, assuming that the cost of production is only a tiny
fraction of the sales price of the oil then A and B both stand to make a net
gain in revenues by reducing prices slightly and undercutting the other. Say
A cuts their price by 1% and C shifts 10% of its oil purchasing to A. A has
gained 9% in sales at an expense of 1% in price. B sees this and responds
accordingly.
> So I don't understand (vi), because I don't see why the oil
> producers wouldn't have increased production in the first place,
> given that they do have at their disposal your option (vi) of
> maintaining the same revenue at lower price.
I think I need to change (vi) to read "In an attempt to maintain revenues by
increasing volume oil producers reduce price in a price war against other
producers". Hmmm... I admit I still need to think about that one.
> > Now, assume for a minute that the increased tax revenues taken
> > in by taxing the oil are used to displace some other tax burden
> > (yes, yes, an unlikely scenario). Then:
> >
> > a. The nation sees no net change in the tax burden
> > b. The nation sees a net decrease in the price of oil
> > c. The oil producing country has a little less income from oil
>
> Now you are saying that the "oil producing country" is
> not the same as the hypothetical country taxing and
> consuming the oil. But if we are talking pure economics
> here, why should that matter? You have also, by taking
> this route, introduced the possibility of international
> competition: by taxing the incoming oil, the consuming
> country's products may be less competitive over all.
Yes, it really shouldn't matter and according to Henry George
(www.henrygeorge.org) it would behoove us to tax natural resources (including
land) instead of taxing income inside our own country. And yes, you are
right, there might be unintended consequenses such as less competitive
products etc. My focus is only on the taxing of oil imports and the price. If
sustainability and a long term focus is what is important then I suspect that
taxing oil imports would overall be a good thing. However I don't deny that
that may come at the expense of some present wealth.
> In short, I've gotten very confused! ;-) Mind starting
> over?
As many times as it takes! I'm not too supprised at your confusion. It is
very hard for me to write clearly and it wouldn't be the first time I've been
asked to expain myself again. :)
> > The net effect: a reduction in the price of oil from
> > the nation's perspective. I.e. by taxing crude oil
> > an oil-importing country can trim some of the
> > windfall profits from the oil exporting country.
>
> "Windfall profits *going* to the oil exporting country"
> I take you to mean. But "windfall profits" don't
> theoretically take place because:
>
> > For the above reasoning I am not considering transient effects. Transient
> > effects and unintended consequences might include things like decreased
> > economic activity, political unrest, me having to sell my beloved gas
> > guzzling SUV etc...
My turn to be a little confused. We know windfall profits take place just by
taking a look at the money being made by the oil producing nations from oil
sales. That money is not the result of human labour(*). What is the
theoretical connection you wish to point out between windfall profits and
transient effects?
(*) Labor: Brain power and or muscle power applied to some productive end.
> > A fun thought experiment eh?
>
> Yes, quite. Such thought experiments may allow me to know
> how all this works! Thanks.
>
> > The best evidence in support of this argument are some of
> > the strong statements the oil producing countries (especially
> > OPEC) make against consumer countries taxing oil.
>
> Yes, of course they would make such statements. But isn't
> the reductio argument above enough to see why? Western
> governments *could* simply tax incoming oil so greatly
> that it can't be imported at all except for those industries
> that use it in only very small quantities.
Yes a country could tax oil imports to zero but that seems like a silly
choice. Assuming my reasoning holds water then the wise thing to do would be
tax at a level that allowed only a few percent of the windfall profits to
return to the oil producing nation. Keep in mind also that my reasoning
relies heavily on the presumption that the oil consuming nation uses the
revenue to displace other taxes. That effectively means that the consumer in
that country sees no net change in their cost of living *dispite* oil
products having increased in price.
Thanks for your thought provoking questions Lee!
Matt
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