2. Let D equal the domestic demand for oil, Sd equal the domestic supply and Si

Question

2. Let D equal the domestic demand for oil, Sd equal the domestic supply and Si equal imported supply of oil for gasoline. Assume the world supply is infinitely elastic and the domestic supply is more price sensitive. Assume we currently import some oil and produce some for the domestic market.
a. Graphically illustrate the scenario above.
b. Our domestic policy objective is to ‘minimize dependence on imported oil.’ Illustrate the effect of 1) an import tax on oil, 2) a domestic oil subsidy, and 3) domestic investment in hydrogen powered vehicles could meet that policy objective. Discuss the welfare implications of each policy option.
c. If the discovery of more domestic oil near the surface makes the domestic supply curve more elastic, show graphically what happens to the effectiveness of the interventions in part b to meet our domestic policy objective (20 points).

Explanation / Answer

b). 1) Tax on oil is to fund major transportation system reforms, there were instant denunciations from many politicians, and especially congressional Republicans. the president is more concerned with his radical climate policies and pleasing special interest groups than providing economic stability for hardworking American families. This proposed tax will do nothing more than raise costs on consumers, who are still struggling with stagnant wages.

But despite the lack of public support, a large number of economists are convinced that taxes on fossil fuels in general are a pretty good idea. There have long been calls by economists for putting a tax on carbon in all of its forms not just from burning oil or gasoline. The goal is to address, in economist speak, the market failure that occurs in this case because of the negative externality that is greenhouse gas emissions.

It seems that some economists support the idea because they believe the tax will curtail use, which may be true but not the intention of the tax. This would be yet another tax on the middle class, like the ACA. So much for only raising new taxes on the rich.

Putting a tax on carbon would bring in huge amounts of revenue to the government. Since there are far more middle class people than rich people, that means the bulk of this money will be coming from the middle class. The end result? There will be no calls for the rich to pay more of their taxes.

b). 2) Security of supply–subsidies are used to ensure adequate domestic supply by supporting indigenous fuel production in order to reduce import dependency, or supporting overseas activities of national energy companies.

Environmental improvement – subsidies are used to reduce pollution, including different emissions, and to fulfill international obligations

Economic benefits – subsidies in the form of reduced prices are used to stimulate particular economic sectors or segments of the population, e.g. alleviating poverty and increasing access to energy in developing countries.

Employment and social benefits – subsidies are used to maintain employment, especially in periods of economic transition.

b.) 3) America cannot wait to curb global warming pollution or cut oil dependence until the hydrogen economy is ready. A responsible, economically sensible energy policy requires a comprehensive approach that emphasizes both near-term results and investment in long-term solutions. Specifically, the United States should act now to implement the following policies: a) Adopt near-term performance standards that require automakers to cut the oil consumption and global warming pollution of their fleets by deploying technologies that reduce carbon emissions, save fuel, or do both. b) Accelerate deployment of off-the-shelf and near-term vehicle technologies and fuels, such as hybrid electric vehicles and biofuels like cellulosic ethanol, which can reduce oil dependence and global warming pollution while providing a potential transition to hydrogen fuel cells. c) Promote the strategic deployment of fuel cells over the next decade, including conducting fleet testing of fuel cell vehicles in the nation’s smoggiest cities to acquire real-world experience with commercialization challenges while also achieving immediate air quality benefits. d) Support continued research and development into fuel cell vehicle technology and advanced hydrogen system technologies, complemented with research, development, and deployment efforts targeted at producing hydrogen from wind, solar, and biomass resources and from fossil-fuel sources with carbon capture and storage. These are the most sustainable options for potential future hydrogen production. e) Support long-term research and development efforts to continue exploring clean-energy alternatives to hydrogen such as biofuels, plug-in hybrids, and battery electric vehicles.

c) In economic terms, the oil supply is becoming less elastic as new oil supplies come increasingly from unconventional oil.  Elasticity is the term economists use to describe how much supply or demand responds to changes in price. If a small change in price produces a large change in demand, demand is said to be elastic. If a large change in price produces a small change in supply, then supply is said to be inelastic.

On the demand side, the elasticity of our demand for oil reflects the options we have to using oil for our daily needs. At a personal level, we can quickly cut our demand for oil a little bit by combining car trips, keeping our tires properly inflated, etc. But the ability to make such reductions is often limited, and even such simple measures come at a cost of time or convenience, which is why we’re not doing them already. If we live in an area without good public transport (as most of us do) we can’t stop driving to work without losing our job, so we keep driving to work, and paying more for the gas to get there.

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