Oil supply disruptions and revolutions in the Middle East beat millions of consumer decisions for the news--and for gestures of concern by our leaders. Nevertheless, Western governments have the means to stabilize crude oil price increases and, thereby, protect the fragile global recovery. All they have to do is be half as bold at home as their rhetoric is abroad.
The underlying problem in the global crude oil market is steadily rising demand not uncertain supply. That will not change fundamentally if oil suppliers swap autocrats or democratize. New governments in the Middle East will face the same demographic pressures and the same desperate need to raise money from increased oil sales to meet their subjects rising demands. What sustains the speculative rise in crude oil prices now is not the prospect of irrational politics in the Middle East. Rather, it is the persistence of irrational energy policies in the West.
Rather than repeat the predictable folly of subsidizing consumers when prices rise Canada and the United States could shock the speculators by taking further action to discourage consumer demand.
With crude oil now hovering around $100 a barrel, there’s little room or need for a big consumption tax. However, the legislatures and governments of Canada and the US could agree on a carbon tax or VAT mechanism that would make sure that today’s prices rise steadily, rather than spike and collapse every few years. Such a measure, complemented by energy efficiency regulations, would send a powerful message to those who speculate in oil futures, invest in green technologies and hold US government bonds.
The mechanism could be fleshed out in days. Both capitals are replete with the necessary expertise and draft tax models. All it takes is the nerve to take action. It would impress the world. Imagine.