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Thanks for the reply. Yeah, the idea is not exactly to change people's behavior (I'm agnostic about people's preferences– they may behave essentially the same) but rather to simply internalize the externalities. (I agree with your point in the blog post that cars have many positive externalities, too, and these are important.)

The (very idealized!) thought about national security policy is that it partly represents a form of "insurance" against oil supply shock, so that big reductions in oil consumption ought to allow reductions in the amount of insurance consumed. Now, there are also plenty of other considerations that drive national security policy, like humanitarian concerns, or non-economic concerns about people dying. But there is no doubt in my mind that economic security is one driver of national security policy.

To take an extreme case, if no one bought Middle Eastern oil, I think the region would have a strategic significance more like South America or Africa — certainly still important to us, but not something we'd be nearly as likely to go to war over. (This counterfactual is admittedly very difficult to sketch out with any certainty– lack of oil money would change the entire game in the Middle East. Nevertheless, my guess involves less money on security.)

Now in reality, we cannot achieve this counterfactual: for example, we cannot control e.g. China's energy policy– they may consume lots of oil regardless of what we do. So because we are connected to China and other countries, we are still vulnerable to ripple effects of oil shocks even if we drastically reduce our own oil consumption. But the main point is, there is an in-principle-measurable relationship between national security expenditures and our degree of economic dependence on failed, unstable, or hostile states. I'll leave it to the experts how much of an externality that is, but it should be internalized.

(FWIW, I hadn't read your blog post before you linked it.)

Even if Congress passes a law that said that no car could be sold unless it got at least 40mpg (so everyone is forced to drive around in tiny aluminum cars), it's not clear to me how this would change our policy in the Middle East.

1) Global warming: yes, definitely we should go after the lowest-hanging fruit. I am not as sure as you are that animal methane is the lowest-hanging fruit, but whatever, let the market decide. A pollution tax would be preferable to a gasoline tax.
(your followup post shifts to arguing for nuclear power. Fine, deregulation may be quite helpful here. But that does not invalidate the argument for a pollution tax.)

2) Interesting comment on the catalytic converter efficiency. A pollution tax would again be best, and not too hard to implement (put a meter onto every new car that pays attention to startups, temperature, etc.).

3) Traffic congestion– agreed. Again, the best solution would be a meter with a transponder that allows an automatically levied congestion tax.

4) Reduce dependence on oil. As Dan Drezner has said (and I mentioned above), the real argument here (as opposed to the oft-posed mistaken argument) supports holding a diversified portfolio of energy technologies. The risk of this resource should be built into the price. Insofar as the oil industry relies on the U.S. government to implicitly "insure" the American economy against oil volatility by holding a military and intelligence presence in the region, this cost should be paid by the people who create the need for this insurance: the producers/consumers of oil.

But okay, I'll concede the point: the military presence reduces the infinitesimal chance that a dictator will stop liking money and therefore selling his oil. It's still not a big subsidy in terms of value-added.

I disagree. A security presence in the middle east can be thought of as a form of "insurance" that reduces the probability that the oil fields will be nuked, let's say.

Think of it in terms of a "portfolio". We are currently heavily "invested" in petroleum, but that investment carries a risk (because it comes from a volatile region). So does anything else: solar energy depends on it being sunny out. Wind energy depends on it being windy enough. Et cetera.

However, these risks are fairly different and uncorrelated. So we should seek a diverse portfolio of energy options to reduce our risk. If a person uses a lot of gas through driving, they are contributing to our economy's overinvestment in the petroleum option. This carries a cost (in risk) and that risk should be internalized.

Now, are we really overinvested in petroleum? I'll leave that to the experts, but this is the thought behind it, anyway. (As I understand it).

Aren't nearly all highways paid for through user fees? either by tolls or by gasoline taxes? Perhaps some tiny portion of gasoline is not used for transport.

Roads built by gasoline taxes may be a subsidy to electric vehicle users. Gasoline taxes and tolls used to purchase trains may be a subsidy to rail commuters. But I don't see how highways are a subsidy to either gasoline producers or to their customers. If anything, gasoline taxes reduce consumption of gasoline.

First, the US tax laws have next to zero effect on world oil price. US supply is a tiny fraction of the world market and zippo of the waterborne (export) market.

Second, subsidies for oil production don't exist in any material way. Look at what the new Democrat congress is doing to eliminate these supposed "subsidies": getting rid of the privilege the oil industry has to use LIFO tax accounting. [Please ignore the fact all industries use LIFO tax accounting, not just oil]

The best argument out there that there are subsidies "for oil" is that the government builds lots of roads. Of course, roads are just as usable by electric cars or ethanol cars as they are for gasoline cars. Gasoline just happens to be more efficient at meeting our human need for transportation, so we use gasoline.

Sometimes people seem to forget that transactions have "internalities" too.

Not even, Brad. I concentrated on U.S. independents and there's plenty of knowledge accumulated in there. Not to mention that there are companies which specialize in 3-D and 4-D seismic and sell those services to whomever. I agree with your post but I would say that the concentration of knowledge isn't with the super-majors but in free markets.

The bozos in the USSR were paying bonuses to drillers for the NUMBER OF METERS DRILLED! Of course, the deeper you drill, the slower it goes, so they ended up with big bonuses for drilling a field of useless shallow holes. Perversely, if you actual got a producing well (accidentally, of course), you were screwed on your bonus because you had to stop drilling to produce the %#@*% oil! All they did was damage the formations and spin their wheels. But hey, it's all Kosher since there were no oil company fat cats profiting off the backs of the hard working middle class, right?

You and Dismal point out exactly why state run anything is always a disaster. The only exception I know of is Saudi Arabia's oil industry, but I suspect that this is because of Aramco.

If you're calling tax breaks a subsidy then there are subsidies. But WHY are there such subsidies?

Environmental regulations and a myriad of other expensive and restrictive regulations imposed on oil companies make it uneconomic to look for oil and gas in the United States. To mitigate some of these expense associated with regulation, the government offers tax breaks. In other words, government creates the problem it seeks to fix.

Compare and contrast what you think are oil subsidies to gasoline subsidies in Iran or corn ethanol subsidies in America.

Yes, I remember seeing similar studies.

I don't think anyone is exactly sure what the Saudis have now, but I have seen the inside of a couple national oil companies and there's nothing like rational decision making going on.

The OPEC cartel's discipline, in the long run, is probably not as big a factor in restricting the supply as polics, incompetence and corruption among the NOCs (National Oil Companies).

It seems to escape most people's attention that the world's oil is largely produced and controlled by government agents, not private entities.

One way to gauge the intensity with which these governments have developed their reserves is to compare the R/P ratios (Reserves/Production) of the NOCs versus the private companies. Many of the OPEC NOCs have R/Ps from 30-100. The typical private company is more like 10-15. R/P is a pretty good indicator of the intenity with which a company develops its reserves. Private companies want to produce their reserves quickly because they appreciate the time value of money. National Oil Companies have their capital siphoned away to buy the latest military hardware, etc.

Anyway, as I mentioned above, we can see the cost at which the private companies can find and develop oil where they are allowed to look and it's $10-$15. We can also see that they aren't allowed to look in many of the most prolific oil basins in the world, and can presume that if they were that number would be lower.

There isn't really any fact base I am aware of that would indicate the free market would produce a $60 or $70 oil price. More like $20-25, I'd say.