Energy Policy for an Economic Downturn: A Proposed Petroleum Fuel Price Stabilization Plan

Abstract

A compelling case can be made for reducing America's consumption of petroleum fuels. Nearly all analysts think that the way to slash consumption of petroleum fuels is through an end-user tax. There is, however, widespread public opposition to higher gasoline taxes. Furthermore, in a recession the appropriate fiscal policy is to cut taxes, not to raise them. This paper proposes a method of stabilizing petroleum fuel prices at a sufficiently high level, without reducing aggregate consumer purchasing power. We introduce a revenue-neutral petroleum fuel price stabilization plan, called the "PFPS" plan for short Under this plan, a government surcharge on the price of oil would phase in and out in an inverse relationship to changes in world oil prices, such that retail prices would rise with increases in the price of oil but would not appreciably fall when the price of oil declines. Any levies collected under the plan would be fully refunded to consumers pro rata. We describe the advantages of such a plan relative to a Pigouvian tax or a program of subsidies and regulatory mandates, as well as its disadvantages. One advantage is that it might incur less political opposition than a tax, because the share of GNP devoted to government would not change (given full refundability), and the government would not be imposing a new cost on voters, but only depriving them of contingent benefits associated with future oil price declines.