Why oil is so important and such a big problem

“Peak Oil” occurs when the rate of extraction of oil from the earth reaches a maximum and thereafter declines. The United States reached Peak Oil in 1970. Since then U.S. production has declined by 50 percent while consumption has increased by 50 percent. The U.S. now imports three quarters of all its oil, with Venezuela and Saudi Arabia being two of the top three suppliers. Ominously, it appears that the world reached Peak Oil last year - at a rate just shy of 1,000 barrels per second!

So what! So what, you say? The fact is that the United States’ extremely high productivity, our whole extremely high standard of living, depends on this wonderful and inexpensive source of energy.  But as its supply diminishes, and as its cost escalates, our productivity and our economy will suffer, along with our current luxurious standard of living.  So the prospect of our supply of oil dwindling is a big deal, a really very big deal indeed.

Okay, so what can be done about it? This is something that can be best answered in retrospect.  Human genius surely will create many innovative solutions and/or alternatives to our economy’s oil-based engine.  But if we wish to meet the challenge, if we wish to survive the downturn, and if the U.S. is to be an economic and technological energy leader, then we must anticipate the problem and attack it now.  Waiting until oil costs $200 per barrel will be too late.

How to conserve oil and receive $7,000

So we must reduce oil consumption and look for alternative solutions.  But how do we do that? In truth, it’s very easy:  just raise the price of oil! This is called basic economics and is by far the most effective and fastest way to reduce oil consumption.  The problem with raising the price is, of course, the high price.  The trick to solving the high price is to replace OPEC’s profit with a government surcharge and then to distribute the revenue to taxpayers, thereby offsetting the higher cost of oil as it ripples through the economy.  Meanwhile, the higher cost of oil will have exactly the desired effect, of stimulating individual and business actions that reduce oil consumption and create solutions and alternatives to the looming oil crisis before it occurs.  And the resulting lowered demand will serve to fend off oil suppliers’ price hikes, thus lowering the effective price of oil for everyone.

As an example, consider a surcharge of $100 per barrel.  That would take the price of oil back to July of last year.  But now, instead of OPEC pocketing the dough, the money is distributed to each and every taxpayer - an average payment of $7,000 for each tax return! This is twice what the average household would pay for gasoline even after the surcharge is imposed.  It is also twice what the typical taxpayer pays in federal taxes!  So part of the payment would cover the increased price of gasoline, with the remainder offsetting cost increases due to other oil dependencies.  Plus a significant bonus  would be included as a prize for those whose oil consumption is moderate. And to sweeten the deal, the cash payments can be given in advance of imposing the surcharge!

The ripple effect of higher oil prices will not be uniform, of course, with some products increasing in price hardly at all and others, such as air travel, increasing very significantly.  Thus natural market forces will encourage every company and every consumer to attend to the challenge individually, in their own ways.  And this, in turn, will unleash the power of American ingenuity and innovation.

In summary, this technique of forward pricing oil and distributing the revenue collected to taxpayers uses basic market forces efficiently and effectively to achieve a number of objectives that we must accomplish in order to survive in the post-peak-oil era:

  • reduced gasoline consumption
  • reduced dependence on foreign oil imports
  • reduced net cost of gasoline (by reduced demand)
  • a net positive financial gain for most households
  • major stimulation of the economy (via payments to taxpayers)
  • reduced carbon dioxide emissions
  • major increases in alternative energy research and innovation
  • leadership in alternative energy (via research and innovation)