Oil Pressure on Dollars, or Dollars Pressure On Oil?

Mar.16, 2008 in Market Outlook, U.S Hot Stocks

Taxing oil would ease the pressure on the dollar. And, if balanced with a cut in income taxes it wouldn’t reduce aggregate consumer demand.

In his new book The Age of Turbulence: Adventures in a New World, Mr Greenspan wrote: “I’m saddened that it is politically inconvenient to acknowledge what everyone knows: The Iraq war is largely about oil.”

If we take this as a given, then the question is whether the “free market” would function more effectively if the price of oil included the cost of the war in Iraq.

Since the war in Iraq is being financed by loans from abroad (e.g. China, the oil states) the true cost of oil has been kept artificially low.

Of course, a tax on oil would be very unpopular with voters, so the current strategy is to inflate the money supply, drive down the value of the dollar, and increase the price of oil (and all other imports) indirectly.

But, even if oil prices are now going up without an oil tax, companies are still be afraid to make the required massive investments in alternative energy for fear that OPEC will start pumping more oil to drive prices down long enough to make their investments in alternative energy go sour in the short run (and companies only think about the short run).

Also, simply adding a new tax on oil now wouldn’t help to get us out of the recession.

So, I would be in favor of imposing a tax on oil (equivalent to the cost of the war on Iraq) if we balanced it with income tax cuts and extended unemployment benefits for those making less than the median income.

But, we also need to stimulate aggregate demand to make up for the drop in consumer demand caused by the decline in home values. Instead of re-inflating the housing market, it makes more sense to invest in alternative energy infrastructure. So, we need a green fiscal policy.

Having the Fed slash interest rates too far too fast is a risky policy. Therefore, we need a combination of monetary and fiscal policy. But, the current $160 billion dollar stimulus package is a bad idea. It encourages consumption spending when the US is already running up a massive trade deficit.

The solution is to institute a green fiscal policy that: (a) stimulates our economy with investments in alternative energy and (b) reduces our trade deficit by reducing our dependence on oil.

Unfortunately, a green fiscal policy won’t be popular with gold bugs who hope that continued fed easing will cause run away inflation. It also won’t be popular with homeowners and banks looking for a bailout. The latter want taxpayers to cover their bad investments and want the fed to re-inflate the housing bubble.

Also, a green fiscal policy won’t be popular with those who have shorted the US market. These guys actually want a recession!

Finally, a green fiscal policy won’t be popular with oil company executives. They want the government to subsidize the cost of drilling oil in places like Iraq, but they don’t want the government to slap a tax on oil to pay for the war.

So, in my view, we need to have the government make massive, direct investments in alternative energy infrastructure to stimulate our economy and to reduce our dependence on foreign oil.

The government should ask advice from the private sector, and once the infrastructure has been constructed (e.g. windmills, solar power collectors, etc.) it could be managed by private firms who bid for the right to lease the equipment from the government. I call this approach green fiscal policy.

So, let the government borrow from abroad if need be, but then lets have them spend the money on investments in alternative energy that will make our country strong in the long run.

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