What the energy world doesn't need now is a big boost to demand. It could do without even a small boost to demand. But presumptive Republican presidential candidate John McCain just proposed one.
But by the standards of demand-boosting policies in other parts of the world, McCain's "gas-tax" holiday wouldn't amount to that much. In an economic address Tuesday, he proposed that Congress suspend the 18.4 cent federal gas tax and 24.4 cent diesel tax from Memorial Day to Labor Day, which is approximately late May to early September. He also said the US should stop adding to the Strategic Petroleum Reserve; the daily 90,000 b/d or so being put into the reserve is a minuscule amount in respect to world demand, but given that all pricing is done on the margin, may be having an outsized impact.
Recently, while preparing for a presentation, The Barrel wanted to include a reference to the many price caps and subsidies going on in various parts of the world that were having the impact of increasing demand. If consumers are protected by government policy from the full brunt of (as of today, at least briefly) $113 crude and all of the related price increases, it means that demand destruction will be limited.
So we reviewed several stories that had appeared on Platts from around the world about governments struggling with their attempts to limit those prices, through subsidies to state refining companies operating at a loss, or through outright price caps and the resulting shortages. What was astounding was that in one week's time, we found at least five stories, mostly from Asia. Five days...a story a day on government efforts that had the unintended effect of lifting demand. And these stories didn't include the more well-known policies in Iran and Venezuela, where gasoline is all but given away, leading to highly ineffecient consumption patterns.
The McCain plan is nowhere near on this level. It's temporary; it doesn't really interfere with market mechanisms, because the base price of the product is not affected, and nothing is subsidized. But it would be the US example of a government looking to find some way to minimize the pain that petroleum consumers are feeling every time they pay their bill, and in so doing boosting demand.
It would take its place alongside similar government policies that have the effect of lifting demand in so many other countries of the world. We just got back from a conference in the Middle East where the enormous growth in demand in that region is coming in part because the oil exporting countries are using that oil wealth to subsidize petroleum consumption. Total Middle East consumption on a barrels basis is about the same level as that of China.
The long-term health of the world economy needs demand destruction. It can be gradual and rational, or it can be sudden and panic-stricken. The latter is far more likely to occur as cash-strapped governments decide to end or reduce their support for petroleum consumption...and that's what it really should be called. Actually, there's a better term for it: crazy. In a world where supply is constrained and demand is straining the world's ability to supply enough, it's crazy to implement policies that give a boost to demand, no matter how politically popular it might be.
Besides...what's wrong with energy taxes? Why is taxing property, or income, or non-energy consumption, so much better than taxing energy? A stiff tax on gasoline, paired with a reduction in the Social Security payroll tax and adjustments in Social Security payments for non-working senior citizens, could result in demand destruction through greater efficiency and less waste, and a concurrent reduction in the cost of hiring a new employee, because the employer pays the payroll tax as well as the employee. Employees with a suddenly higher paycheck are not going to use that windfall just to buy more gasoline; they will react to the price signals sent by the higher levy and reduce their consumption.
Chances of this being enacted: zero.
I like the idea you propose about moving some of the taxes from social security and other employer taxes to gasoline. Perhaps it it the carbon tax in disguise, but I like it.
To solve once and for all the dilema about energy planning and how the impact of crude affects capital planning, I suggest the federal government go one step further. Effectively, pass a law that now crude is at $114 per barrel, for eveery penny it drops, we add back the penny and it goes to the US treasury to pay down our natinoal debt. Obvioulsy, it probably won't drop if the markets realize they are losing money to the govertnmnet, but if it does drop, what a great windfall. In addition, it would help us plan better and to actually build a lot of badly needed energy projects as to become self sufficient and to get away from our balance of trade deficit to some degree by encouraging biodiesel, coal to liquids and other energy projects which need a price support to be profitable of about $70 per barrel. Everybody wins.