Oil Economics Test Questions – Ripped from the Headlines
While Kash covers some recent revelations about the 2001 Cheney energy task force, James Hamilton designs an exam essay question:
Sometimes I like to base exam questions for my students on recent news. Here’s an exam question to see how thoroughly students understand the economic issues associated with today’s allegations about oil companies and the Cheney energy task force.
Dr. Hamilton has already received some interesting answers that addressed what might have happened had Congress passed the Bush proposals. The first question on his exam asked the student to:
Discuss in detail three elements of this plan that led to an increase in oil prices.
Actually, the proposals from yours truly and Andrew Samwick to impose higher taxes on oil and/or gasoline might be seen as price-increasing whereas the Bush-Cheney proposal was all about subsidizing oil suppliers. OK, the proposal only used the term subsidy once but talked about tax credits almost 30 times. The proposal had several other places where taxpayer funds would be used to subsidize energy.
Which is precisely why I’m elated that it did not pass – and I’m hoping nothing like this boondoggle ever will get through Congress. Before the average Joe who is paying a lot for gasoline decides that Dr. Samwick and I have gone nuts and the Bush&Cheney were looking out for their interests, let’s consider the incidence of a subsidy when the supply curve inelasticity is very small. A subsidy might be seen as reducing the price consumers pay but it also increases the amount suppliers receive – with the lion’s share of the benefit accruing to the supplier. Conversely, a tax along the lines that Dr. Samwick and I are suggesting would slightly increase the price consumers pay but the lion’s share of the impact would be on oil company profits.
Of course, the average Joe might counter that Bush&Cheney lowered their taxes by a modest amount. But remember that the massive increase in Federal deficits under their watch means deferred taxes have increased a lot. And who will pay all those deferred taxes? The shareholders of the oil companies or average Joe? It seems Bush&Cheney refuse to say.
Then again, the GOP leadership has twisted a few arms to take food from the mouth of children, which would pay down a few pennies of this staggering debt. Of course, I may have to eat crow for this. But hey I own oil company stock and have a good day job, so I can afford some wine with my crow.