There is a sense that oil increasing in price over the past several to the extent it has, results in a huge increase in the amount of money flowing from consumers to the sellers of oil. There is no assurance that this huge new flow of cash will be employed to generate energy alternatives. This new money drain is a negative for the economy in that it drains purchasing power hobbling consumers’ ability to make purchases in other important market sectors. On the other hand high oil prices are good in the sense that they reduce the demand for things that use a lot of oil or gasoline - a direction we need to go for a host of reasons.

 

Is there a better way? Is there a way to immediately curtail oil consumption without crippling consumer purchasing power? Ideally, we would like to find a way to make market forces come into play that reduce our country’s purchases of oil yet keep US consumer purchasing power at the level it was several years ago. This may mean finding a way to artificially reduce US demand for oil as seen by oil sellers in order to force their prices down to former levels and at the same time generate a very strong financial incentive for the public to demand (and pay for) alternative energy sources and products.

 

A process similar to rationing might be the best way to do this.

 

Simple rationing of gasoline could (artificially) force total US demand for oil (as seen by sellers) to drop, therefore prices would follow. But the problem with simple rationing is the overwhelming task of setting appropriate ration levels for all levels of use and for all individuals and industries. For example during WWII food stamps were used to assign different food rationing levels to different situations. But the task of determining workable oil stamp levels for the whole population would be an impossibly massive and difficult task. In addition, while reduced availability of oil may cause increased interest in energy alternatives, the price of oil (artificially held low this way) would not.

 

To avoid these problems while gaining the economic advantages of rationing, a process similar to the “cap and trade” process proposed for international emissions trading might be considered. Emissions cap and trade is described as follows:

“A central authority (usually a government or international body) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups are issued emission permits and are required to hold an equivalent number of allowances (or credits) which represent the right to emit a specific amount. The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level. Companies that need to increase their emissions must buy credits from those who pollute less. The transfer of allowances is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than was needed. Thus, in theory, those that can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.”

 

In the case of the proposed gasoline cap and trade program, the government would issue equal gasoline allowances to every United States citizen. We can think of these electronic allowances as a book of “gas stamps” for each citizen. Any time you buy gas at the pump, some of your (virtual) stamps are automatically deducted. However, as was the case for emissions trading, people would be able to buy gas stamps from others or sell their gas stamps at will. Similar to an electronic stock exchange, an electronic “stamp” exchange would be established that would make it easy to buy additional stamps at the pump and at the going exchange rate. And at any time an individual could make some of their stamps available for sale on the exchange.

 

The upshot of adopting cap and trade for oil, is the following:

1.      Oil and gasoline prices will be substantially depressed when the government drops the total US market below oil availability levels.

2.      Everyone is issued the same amount of gas stamps each quarter.

3.      Using the stamps you can buy gasoline at the pump until you exhaust your stamps.

4.      If you run out of stamps and want more you can buy them automatically at the pump from other stamp holders who have offered them for sale.

5.       Those who use less gas than their stamps permit will be able to sell them for cash. For them the already low gasoline prices are effectively lowered further by selling their unneeded stamps.

6.      Those who use more gas than their stamps permit must buy extra stamps at the pump. For them the low gasoline prices are effectively raised by the cost of the extra stamps. This cost increase could be substantial.

7.      While by buying stamps and using lots of gas some may end up paying even more per gallon for gas than they do today, no money would be lost (or gained) by US consumers as a whole due to these transactions. In other words the aggregate US consumer purchasing power for things other than gasoline or oil is neither reduced nor increased anytime stamps are bought and sold.

8.      But the cost per gallon to the average consumer will be much less than it is today because in this approach, the government restricts the total US market to a level below oil availability and in doing so pulls down the sellers’ prices. As a result US consumer purchasing power for non-oil goods will be greatly enhanced.

9.      As the traded stamps become expensive, the cost of being a very large gasoline or oil user could become dramatically high. As a result heavy users are penalized, light users are rewarded and their investment in energy alternative products is more likely to be accelerated.