Economics for your Classroom from 
Ed Dolan’s Econ Blog 
The Economics of a Price- 
Smoothing Oil Tax 
Revised Nov. 13, 20...
Oil Prices Crash—Should We Celebrate? 
 Oil prices have fallen below $100 for 
the first time in more than two years. 
 ...
How Oil Producers Protect Themselves 
 Oil producers like Norway, Russia, 
and Saudi Arabia have learned to 
protect them...
How consuming countries can protect themselves 
 Strategic oil reserves can give 
consuming countries some limited 
short...
How a Price-Smoothing Oil Tax Would Work 
 A price-smoothing oil tax would begin 
by setting a floor oil price X 
 When ...
An Oil Tax would Enhance National Security 
 When world oil prices are high, money 
flows producers may of whom are 
corr...
Protecting the environment is not all about climate change 
 High prices encourage investments in 
conservation and alter...
A Variable Oil Tax Could Help Protect Against Recession 
 Oil price spikes have often be followed 
by recessions in the U...
Energy Taxes are Good Fiscal Policy 
No one likes taxes, but taxes of some kind are an 
unavoidable part of public finance...
The Bottom Line 
The bottom line: 
 We do not have to accept the damage to 
national security, the environment, and 
the ...
For more slideshows, follow Ed Dolan’s Econ Blog 
Follow @DolanEcon on Twitter 
Click here to learn more about Ed Dolan’s ...
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The Economics of a Price-Smoothing Oil Tax

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An oil importing country can protect itself from the adverse effects of price volatility and encourage energy conservation by implementing a tax that varies inversely with the global oil price, thereby smoothing the domestic price.

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The Economics of a Price-Smoothing Oil Tax

  1. Economics for your Classroom from Ed Dolan’s Econ Blog The Economics of a Price- Smoothing Oil Tax Revised Nov. 13, 2014 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
  2. Oil Prices Crash—Should We Celebrate?  Oil prices have fallen below $100 for the first time in more than two years.  Consumers are dancing at the gas pumps, but economists and environmentalists have reservations  Big fluctuations in oil prices cause uncertainty that undermines investments in energy conservation  What could be done to protect against oil price volatility? Nov. 13, 2014 Ed Dolan’s Econ Blog
  3. How Oil Producers Protect Themselves  Oil producers like Norway, Russia, and Saudi Arabia have learned to protect themselves from the curse of oil price volatility  They do so using national wealth funds that build up when prices are high and run down when prices are low A Norwegian Oil Platform Under Construction Photo source” Ranveig http://commons.wikimedia.org/wiki/File:Oil_platform_Norway_new.jpg Nov. 13, 2014 Ed Dolan’s Econ Blog
  4. How consuming countries can protect themselves  Strategic oil reserves can give consuming countries some limited short-run protection against supply interruptions  To encourage energy efficiency, they can use a price smoothing oil tax  Such a tax would put a floor under energy prices and encourage investment in conservation measures like fuel-efficient cars, better home insulation, and more efficient industrial processes Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  5. How a Price-Smoothing Oil Tax Would Work  A price-smoothing oil tax would begin by setting a floor oil price X  When the world price P falls below X, a tax of P-X would make up the difference  When the world price rises above X, the tax would be zero Photo source: http://commons.wikimedia.org/wiki/File:Gas-pump-Indiana-USA.jpg Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  6. An Oil Tax would Enhance National Security  When world oil prices are high, money flows producers may of whom are corrupt, undemocratic, or anti- American  An oil tax would insert a wedge between the US price and the world price  Pushing the US price higher would encourage conservation and investment in alternative energy  Pushing the world price lower would deprive hostile countries of revenue Photo source:http://commons.wikimedia.org/wiki/File:Marines-with-sniper-rifle-2.jpg Nov. 13, 2014 Ed Dolan’s Econ Blog
  7. Protecting the environment is not all about climate change  High prices encourage investments in conservation and alternative energy  That is important for people who are concerned about climate change, but that is not the only environmental benefit  Energy efficiency also has immediate, tangible benefits on local air quality, health, and road congestion Photo source: Massimo Caratinella http://commons.wikimedia.org/wiki/File:LosAngelesSmog.jpg Posted Mar. 1, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  8. A Variable Oil Tax Could Help Protect Against Recession  Oil price spikes have often be followed by recessions in the United States  High oil prices reduce spending on other goods and services and undermine consumer confidence  A tax-smoothing oil price would help reduce the volatility of oil prices Economist James Hamilton has written extensively on the effects of oil price shocks on the US economy. See his recent blog post on Econbrowser for some data and references Nov. 13, 2014 Ed Dolan’s Econ Blog
  9. Energy Taxes are Good Fiscal Policy No one likes taxes, but taxes of some kind are an unavoidable part of public finance. If introduced on a revenue-neutral basis, a price-smoothing oil tax would improve incentives for energy efficiency while permitting a reduction in other corporate or personal taxes that distort incentives elsewhere in the economy Nov. 13, 2014 Ed Dolan’s Econ Blog
  10. The Bottom Line The bottom line:  We do not have to accept the damage to national security, the environment, and the economy caused by extreme oil price volatility  A variable, price-smoothing oil tax could mitigate extreme swings in oil prices and improve incentives for investment in conservation and alternative energy Nov. 13, 2014 Ed Dolan’s Econ Blog
  11. For more slideshows, follow Ed Dolan’s Econ Blog Follow @DolanEcon on Twitter Click here to learn more about Ed Dolan’s Econ texts or visit www.bvtpublishing.com

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