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Breaking the Boom-Bust Oil Cycle

Jason E. Bordoff, Policy Director, The Hamilton Project
Gilbert E. Metcalf, Professor of Economics, Tufts University

“..Low oil prices also take the wind out of the sails of alternative-energy ventures, which would be unfortunate because, while oil prices are low right now, they won’t stay that way. Once we move past the current global recession, prices will shoot back up, thanks to the demand shock from rapid economic growth and supply constraints caused by underinvestment. Tighter supplies will also mean greater price volatility down the road.

Faced with this reality, policymakers need to take measures now, while prices are low, to encourage both conservation and development of alternative energy sources. But what are the options? A gasoline tax is a hard sell politically and ignores the 35 percent of oil consumed in the United States in forms other than gasoline. Moreover, a gas tax won’t directly reduce price volatility-it will only add to the pain of the next oil price spike. Others have proposed a price floor on oil, but that has an element of arbitrariness to it: There’s no reason consumers should enjoy all the benefits of market price declines until some random price point, and none of the benefits beyond that point. “…Link to full article

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