Part of our economic mess starts with the huge flow of dollars sent outside the country to buy oil. We could produce oil from domestic sources, but the base cost is higher than pumping oil out of the ground and shipping halfway around the planet. If the market price is high enough, investing in production from domestic sources looks like a good idea. If the price of oil on the global market drops - as it did in the 1980’s, then domestic production cannot compete.

If you visit towns in western Colorado and south-eastern Utah, you can see a boom-and-bust pattern of development for the 1970’s and 80’s. In the 1970’s the notion of extracting shale-oil got a lot of investment, and caused a modest boom in development. The low oil prices of the 1980’s killed investment in (then uneconomic) shale oil extraction, and development slowed. Investment in shale-oil production since that time has proved a bit slow, as investors are not entirely confident the world oil prices will stay high enough for profitable production.

Keeping dollars in America means more productive economic activity within the country. Domestic oil production should help stabilize consumer prices. How can we fix the cost of imported oil high enough so that domestic production stays profitable?

We could place a tax on imported oil, but this seems likely to become a mess. How would we tax different grades of oil? What about refined products? Is politics likely to grant different rates to different nations and oil companies? We would need a new bureaucracy to set tax rates, would most likely get things slightly wrong, and create new nonconstructive opportunities for politics and corruption.

Better to not create new opportunities for bad behavior.

A far simpler approach would be to place a large retail tax on gasoline, and offer an equally large tax credit for domestic oil production. The idea is to have no net effect on the retail cost of gasoline produced from domestic sources, but make non-domestic sources more expensive - enough so that domestic production is profitable, and investment in domestic production is safe.

I once heard that shale-oil production is profitable when the world oil price is above $70 per barrel. The low point in world oil prices (that killed development of shale-oil production) was around $30 per barrel. A tax of about $40 per barrel (or $1 per gallon of gasoline) should be enough to insure that domestic production is assured profitable. Given assured profits, all feasible forms of oil production (including sustainable production from biologic sources) should be able to attract the level of investment that they need.

Put differently, by making one simplest-possible change in the ground rules, we can let the market solve the production problem, without more-complicated government intervention.