The US/Israel attack on Iran and resulting closing of the Straights of Hormuz has reduced the world’s oil supply. As a result, gasoline prices are increasing. Is that good or bad? Should the federal and state government suspend gasoline taxes until normal supply is restored?
When the supply of something is artificially reduced, its price increases to equate the new supply and demand. For gasoline, the impact of the supply shock can be moderated by releasing oil from the reserve the US and most countries maintain for such shocks. Thus the fall in gasoline supply would be kept smaller than it would other wise be. But how long will the supply shock last and how large is the reserve.?
The natural price increase in the face of a supply shock has several helpful effects. Those who need it most can still get it. Some non essential travel is reduced. President Nixon’s wage and price freeze in the early 1970s when confronted with the 1973 Arab oil embargo produced long lines of cars at gas stations that still had some gasoline. Price rationing is better than waiting in long lines
President Trump has proposed temporarily suspending government taxes on gasoline. This is a very bad idea not only because of the Nixon shock effect of non-price rationing but because it will reduce government revenue when its debt and deficits are already dangerously large. In the May 11 Washington Post Mitch Daniels provides an excellent account of that danger. “US national debt disaster looms-ai cant-stop it” If you click on his link to a Cato Institute article on MMT you will be able to enjoy my article on that subject. “Modern Monetary Theory-critique”
Author: Warren Coats
I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy. I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989. After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017. Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75. I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise. In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.” My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202
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Taxes should obviously be raised. That is a no brainer.
Your argument is part of a much larger structural question that economists, engineers, ecologists, and industrial strategists are increasingly forced to confront:
Should hydrocarbons be treated primarily as:
or
The distinction is profound because combustion is effectively a one-time, entropy-maximizing use of an extraordinarily valuable molecular resource.
A barrel of oil is not merely “fuel.” It is concentrated chemistry created over geological time:
When burned, most of that structural value is destroyed within minutes.
Your perspective aligns with a growing “carbon hierarchy” concept:
In such a hierarchy:
would outrank:
The core economic issue is that markets historically priced oil primarily by calorific energy value, not by irreplaceable material value.
That creates what could be called a civilizational allocation error.
The paradox is remarkable:
modern society burns the very molecular feedstocks needed for advanced civilization because combustion markets became dominant before alternatives matured.
Electrification changes this logic.
Once:
become electrified or hydrogen-assisted, the argument for preserving hydrocarbons as material feedstocks becomes much stronger.
This is where your position intersects non-linear economics.
A technological system often changes slowly, then suddenly.
For decades:
But once electrification crosses critical thresholds:
the economic topology changes.
Then hydrocarbons begin shifting from:
“primary energy”
to
“strategic industrial carbon.”
That is a structural transformation, not merely an environmental one.
Your taxation argument is also deeper than ordinary “raise taxes” politics.
There are several separate economic logics involved:
First:resource rent theory.
Oil and gas deposits are geographically fixed natural assets.
A nation did not “create” them through ordinary entrepreneurial effort.
Thus many economists argue extraordinary rents should partially return to the public.
This logic underlies:
Second:externality pricing.
Burning fossil fuels imposes:
Traditional markets historically externalized these.
Carbon taxes attempt to internalize them.
Third:transition acceleration.
High taxes can intentionally alter capital allocation:
away from long-lived fossil infrastructure,
toward electrification and renewables.
But here the non-linear problems appear.
If taxation becomes too abrupt:
This is why transitions are politically unstable.
The engineering system, labour system, financial system, and democratic system all evolve at different speeds.
You are really describing a coordination problem at civilization scale.
Your insight about plastics “locking away” carbon is also important but complicated.
In principle:
durable polymers can act as semi-long-term carbon storage.
But present systems have major failures:
So the future question becomes:
Can humanity build a closed-loop carbon-material economy?
That would mean:
Some firms are already attempting this through:
The emerging vision is:
carbon cycling rather than carbon extraction-and-release.
Your broader geopolitical point also matters.
Much of modern geopolitical tension is indirectly about:
Oil states fear:
Industrial states fear:
Meanwhile emerging powers seek:
Thus climate policy is never only environmental policy.
It is:
Your framing also touches a deeper philosophical issue:
A civilization can either:
or
Combustion civilization prioritized throughput.
A circular carbon economy would prioritize:
That is not merely a technical transition.
It is a different theory of economic organization itself.