26 May 2008

Black Market Oil

As oil (aka, black gold) gets more valuable, people are coming up with more ways to make a quick buck. The scams range from outright theft of oil, reclassifying oil or gas from one tax category into a cheaper category, and smuggling gasoline around tax collection points. The Department of Transportation estimates that fraud costs $1 to $10 billion/year -- i.e., they don't know how much it costs.

Federal and state tax assessors, road engineers, and bureaucrats are upset because they want that revenue. They are suggesting a broad classification of oil and distillates (to avoid classification games) and taxing oil at the refinery (instead of the retail point of sale). This latter idea is opposed by the refineries "because that would force them to pay taxes before they sold the fuel". This predictable objection is weak.

Let's put these arguments (and this situation) into perspective: Total state and federal gas taxes in 2005 were $36 billion. The main article quotes road engineers saying that $1.6 trillion of spending is "necessary" over the next five years. If that happens (and tax revenues stay constant), that means that drivers are going to get subsidized for 89 percent of those costs.

Of course, if gas taxes rose to the level that would cover those costs (from the current national average of 47 cents/gallon to, say, $4.50/gallon, i.e., gas that costs about $8.00/gallon), driving would fall below levels we see today (and it's already falling), and gas in the US would cost about the same as gas in Europe NOW. Of course, the rewards for smuggling and dodging gas taxes would also rise -- and governments would spend far greater resources on collecting much higher taxes.

Note that higher taxes would kill three birds with one stone: funding repairs, taxing carbon and discouraging consumption.

Bottom Line: Basic cost-benefit thinking leads us to work harder (to avoid or collect taxes) as the value of those taxes rises. One way or another (through dearer oil or higher taxes), the institutions for managing gas and oil are going to beef up security. Not too far in the future, we will see as much attention on the management of oil as we now see on the management of beer, a product that used to be worth far more than gasoline, is now worth about the same and will probably be worth far less in the near future. (What about water? Wait and see.)

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