Samuelson in Newsweek argues that cheap gas is a bad habit. He neglects to mention that consumers aren't really paying the true market cost of petrol - it is much cheaper than what it is sold for at the pump. Only a disruptive technology will replace fossil fuel.

Samuelson writes;

What this country needs is $4-a-gallon gasoline or, maybe, $5. We don't need it today, but we do need it over the next seven to 10 years via a steadily rising oil tax. Coupled with stricter fuel-economy standards, higher pump prices would push reluctant auto companies and American drivers away from today's gas guzzlers. That should be our policy.

Why?

Katrina's message is clear: we are vulnerable to any major cutoff of oil. This cutoff came from a natural disaster, but the larger menace is a political cutoff. Two thirds of the world's proven oil reserves lie around the Persian Gulf; these countries, led by Saudi Arabia, now provide about a quarter of today's oil supply. This flow could be interrupted at any time for many reasons--terrorism, war, domestic upheaval, deliberate cuts. Many other oil exporters are similarly unreliable: Russia (the No. 2 exporter), Venezuela (No. 5) or Nigeria (No. 8).

Americans were upset at $3.50 a gallon for petrol, especially when it was rising 20c to 50c a day based on speculation more than anything else. But Samuelson does not mention that in the US petrol prices at the pump are inflated up to 27% (2003) by federal and state taxes. Some states in the US have additional consumption taxes on petrol as well.

Australia also has significant taxes on petrol as well, Beattie claiming in Queensland parliament recently that the federal government excises a 38.143c levy on each litre of petrol. At $1.20 a litre, that is nearly 33% in tax, and does not include what the states take in tax from petrol.

There is an environmental cost to using fossil fuels, but adding taxes doesn't take this into account. This money does not go toward R&D for alternative fuels, nor public transport, nor to climate study, nor to any other environmental issues. The taxes do not support a carbon credit exchange system either. They are just taxes.

We are actually paying up to third more for petrol than the actual market price, for what benefit? Australia remains a car culture?

The only way fossil fuels are going to be replaced in transportation is through a disruptive technology. If Samuelson wants the US to ween itself off oil, it had better give its scientists and engineers money to create a disruptive technology that is superior to fossil fuels. Making marginal technologies economically feasible through skewing the market with taxes won't work. It will have to be a disruptive technology.

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This is a PDF paper from B.W. Robinson, B.J. Fleay and S.C. Mayo called, The Impact Of Oil Depletion On Australia [pdf]. It is from the "Sustainable Transport Coalition". I am not mocking them. I am sure they have good intentions, but their solutions wont be politically acceptable, wont be socially acceptable, wont be culturally acceptable and will just end up penalising those who are the most fiscally vulnerable.

If this is the best that those who are committed toward a reduction in oil consumption can come up with, then it will have to be a disruptive technology that replaces oil. People want their cake, and eat it too. Unless the replacement is advantageous, cheaper, and sexier - people will not do without - no matter the long term damage. The singularity will be reached at 5 litres to the 100 kms.

Several interesting statistics from the paper in relation to Australia;

• About 80% of Australia's petroleum liquids use is in road transport and 10% for aviation.
• Australia uses about 0.74 million barrels of oil products each day
• Australia is still about 60% net self-sufficient in oil, but our imports are currently about 85% of daily usage.

The paper's solution suggests that government should;

• Issue repeated credible warnings that oil shortages are approaching us.
• Engage the community, through participatory democracy, to create practical, equitable options and countermeasures, and to select preferred steps.
• Dismantle the many "perverse polices" [10] that subsidise heavy car use and excessive freight transport.
• Instigate policies, taxes and pricing regimes that encourage frugal use of fuel, and disadvantage profligate users.
• One novel policy would be to set up a Smart- Card personal fuel allocation system.
• Recognise the psychological and social dimensions of automobile dependence as well as the physical aspects, and implement the cheaper people oriented solutions as well as technologically based alternatives.
• Implement nationwide "individualised marketing" travel demand management campaigns.
• Divert infrastructure funding to less oil dependent urban structure and transport options.
• Priority access to remaining oil and gas supplies must provided for food production and distribution and other essential services.
• Promote through the United Nations a Kyoto like protocol to allocate equitably the declining global oil production among nations.

Another of their solutions is to increase tax, which theantix argued for on HuSi, and Scrymarch did here. From their paper;

A fuel tax escalator such as that introduced by the UK Thatcher Government in 1988 is a proven example. Australian fuel taxes should be incrementally raised to European levels to reduce usage, and to provide funds for improvements to health and education and for the needed sustainable transport infrastructure.

Provide funds for improvement to health and education? Aren't our income taxes supposed to do that? This is why I am against raising of tax on petrol. It just assumes that it goes into the great fuzzy belly of government, and that government requires an inexhaustible, and unquenchable supply of tax.

Their solutions are nice, but none are really concrete. They also avoid the fact that petrol is cheap to extract, refine and distribute. Petrol is cheap because we pull it out of the ground in millions of barrels a day, transport it across oceans and seas millions of barrel at a time and then distribute it to millions of petrol stations at a time.

Petrol is cheap. They attempt to artificially create scarcity through increasing taxes and allocating petrol like water is under drought restrictions. I don't see that working, it will probably only cause frustration and create a black market as petrol is remarkably cheap, as I have mentioned several times.

Petrol is a problem because combustion engines are so inefficient, and produce noxious by-products. Another issue is how batteries have not followed Moore's Law like most other technologies have. Batteries are largely unchanged from fifty years ago, don't maintain their charge, and are slow to recharge.

So we have the problem of a responsive energy generation system that is inefficient. We also have no means to store created energy efficiently in a way that can be used in decentralised transportation.

A reliance on oil is not acceptable in the long term as it is a pollutant which contributes to global warming. Yet despite the high taxes every nation has on petrol, not alternative technology has stepped up to the wicket to take automotive power from the combustion engine. The best we have managed so far is to mix the technologies of combustion engines and batteries. How 20thC.

Is that the best we can do?

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Tuesday, Fuel excise to increase petrol price burden . From the Liberal party room in Canberra was heard a loud OMFG WTF? Wednesday, Govt scraps fuel tax plan . Who says populism isn't alive and well.

From the Tuesday news report;

The already high cost of fuel may be boosted by a decision taken by the Federal Government to increase petrol taxes from next year.

Two years ago Treasurer Peter Costello announced the petrol excise, which is currently capped at 38 cents a litre, would increase from January next year.

He said the increase was a way of encouraging the production of clean fuels.

Tax coal too then. ... From the Wednesday news report;

But after press reports this morning, Prime Minister John Howard announced a policy review.

"I can assure the Australian public that it is being reviewed and is being reviewed very soon," he said.

This afternoon, Treasurer Peter Costello issued a statement, saying given the current market conditions, the Government has decided there will be no rise.

Mr Costello says the incentive for friendlier fuels will instead be funded from the Budget.

Excise will remain at 38.143 cents.

The Howard government is the most taxatious government in Australian history. That magic budget (pudding) can do a lot of things without needing to raise more taxes.

Hartcher writes about the current pressures on oil prices around the globe in an article titled; "The pain of oil addiction hits home" . However he contradicts himself late in the article, and exposes the conundrum of oil and petrol energy, its current high prices will only make it more plentiful on the world market. We cannot use capitalism to escape oil dependency as; one, capitalism makes scarcity abundant; and two, we currently have no other option.

Hatcher writes on external costs of oil;

In 1980, as the world struggled to overcome the oil price shock of the late 1970s, Jimmy Carter declared what would become known as the Carter Doctrine, declaring Persian Gulf oil to be a "vital interest" of the United States. He told Congress that Washington would use "any means necessary, including military force," to keep the oil flowing.

Australia carries its own military cost for oil. Our Collins class submarines, Orion P3Cs and F111s are for projection of power across the North-West shelf, particularly where Australian and Indonesian oil conflicts may arise.

Hatcher also writes;

Today the world oil market is sending this simple signal: the world is short of energy. This will force change on a world that is otherwise not terribly interested in giving up its addiction to cheap oil. The high oil price is already encouraging more exploration for energy around the world;

There is the nub. Whether it is the coal sands in Canada, or some new engineering process which makes cracking some other form of oil cost-efficient, we are not replacing it. Higher prices won't translate to humanity moving away from the oil economy. It may if the cost of oil jumped by 1000%, but it isnt. At worst it will be 100%, which can be tempered by governments dropping some of their taxes on it.

Capitalism commoditises the scarce. Whatever non-drilling form of oil we find will be turned into a cheap oil commodity. New engineering processes will ensure that the cost of production keeps dropping. New technologies will drop the price of distribution. We will be back to where we were in the nineties quick-smart; cheap oil as far as the eye can see.

It will have to be a disruptive technology. Fund the scientists and engineers! Drop taxes on any startup which is in the non-oil energy market. Let people buy research bonds in decentralised energy projects. Anything. Otherwise we will just make oil cheap through new methods, and nothing will change, except salaries increasing to cover the cost of petrol at the pump.

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The cheapest oil on the planet is in Indonesia. The government subsidies it heavily, to the tune of about 3% Indonesia GDP, and approximately 30% of the Indonesia government budget. By comparison, Australia spends about 2% GDP on its military. This is a pretty massive and expensive subsidy for the Indonesia government. They have tried to remove it in the past, Suharto tried so in 1999 at the IMF's urging, but coupled with contagion, this contributed toward the Indonesian's throwing Suharto out. President Yudhoyono is going to remove the subsidy, Indonesians can expect to see petrol price rises of nearly 90%.

From the ABC Asia Pacific article;

Indonesia is the biggest oil producer in South East Asia but, due to ageing oil fields and underinvestment in exploration, domestic production has been unable to keep up with growing demand. In 2004, Indonesia became a net importer of oil for the first time. But the products are being sold to consumers at much cheaper prices than Pertamina is forced to pay on the world market.

...

Subsidies are also blamed for the black market trade in cheap petroleum products bought in Indonesia and smuggled out to be sold at higher prices in countries such as Singapore. Eighteen Pertamina officials were implicated in a smuggling ring uncovered this month.

The fight for a secular liberal democracy and a market economy in Indonesia goes on. From some of the interviews of Indonesians I heard on NPR, it sounds like Indonesians accept that the removal of subsidies is necessary, though many qualified this by wanting the money saved to be spent on other services and infrastructure for the people. Others worried that this money might disappear to corruption.

The eyes of politicians and economists around the world will be on Indonesia as it removes the subsidy and Indonesians get used to higher gas prices.

It appears that the Russian demand for Ukraine to pay the market price of gas has destabilised the relatively new government - as was probably intended.

From the article;

OPPOSITION MPs in Ukraine have issued a stinging rebuke to President Viktor Yushchenko by voting to sack his cabinet over last week's deal to end the "gas war" with Russia.

A motion of no confidence on Tuesday was backed by 250 votes to 50 to dismiss the Prime Minister, Yury Yekhanurov, and his cabinet and reappoint them as acting ministers until elections in March.

Many MPs had reacted furiously to the deal with Moscow, under which control of Ukraine's gas imports was handed to a shadowy trading company called RosUkrEnergo, which has refused to reveal who owns half of its shares.

Russia was in a win-win situation either way. It should also be remembered that Indonesia recently removed their oil-subsidies which led to a 90% increase in the price of oil. It survived the bump as all good stable societies and democracies do. Yushchenko has probably sold the will, resilience and democratic demands of the Ukrainian people short. It will be interesting to see if he pays for it in March.

This is a blame the government and oil companies type of op-ed, however it has some interesting figures in it.

In January of this year, the U.S. used 4% less petroleum than we did a year ago. (Oil demand was down 3.2% in February.) Furthermore, demand has been falling slowly since July of last year.

In 2003 I payed $1.50 USD a gallon now I am paying $3.50 a gallon. The price increase was both was sudden and constant. It was blamed on a number of issues, Katrina, Iraq, China, India, tornadoes, vacation driving, you name it. However it appears that refineries in the US have twice as much in reserve each month than they did a year ago and ethanol, while putting pressure on food prices, is alleviating demand. This isn't being seen at the petrol pump.

This is the problem; even with pricing doubling in five years and the US cutting back consumption, it is still an oil economy simply because oil is so cheap - even when it is expensive by modern standards. Europe pays about $8 a gallon for their oil yet its economy and transportation system are still base on oil and its resultant infrastructure. European cars, while smaller, are still burn oil. Even when oil is made artificially expensive through government taxes it is still very cheap. This is not going to change anytime soon.

Oil Industry from a guy with a camera's photostream.

James Hamilton argues that fundamentals, rather than speculation are ultimately behind the rise in oil costs:

The developed economies consume a disproportionate share of the world's energy, with North America and Europe accounting for about half of the total oil use in 2006.

However, it is the newly industrialized countries and oil producers that account for the recent rapid growth in demand, with Asia and the Middle East accounting for 60% of the increase in petroleum use between 2003 and 2006. North America and Europe contributed only 1/5 of the growth.

Despite China's disproportionate increase in the use of oil they still use less than a third of the barrels per person that Mexico does.

It was not that long ago that Indonesia removed its subsidies for oil. They were subsidising it to the tune of 3% of Indonesia GDP. Suharto had tried to remove the subsidy and this, in part, led to the social instability that over-threw his junta-like dictatorship. As a liberal democracy the subsidy was removed without social disturbance. Another sign of how Australia's northern neighbour is maturing as a social and political entity.

This is a heat map of gasoline costs as a percentage of income. The hardest hit areas are around the 10% of income mark.

Via John Robb, this is a graph of oil expenditure as a percent of GDP predicts that it will be 10% of US GDP by 2010.

Ouch.