Here’s a new twist to my post below on a $100 floor price of oil.

Creep up the floor price.  Imagine something like a $5 rise in the floor per quarter, and leveling off at some point, maybe even at $150/barrel.

Several important reasons for this twist:

1. it would gradually phase in the pain (even though all the money should be given back in the form of lower taxes elsewhere — I propose this should be tax neutral.  The only purpose should be encouraging different use patterns and stability and predictability.

2. it would be a dramatic boost to the car industry.  Here’s what I learned about the car industry since I wrote my last post on this: the car industry needs predictability to succeed.  The wild volatility in the price of fuel is what causes the making of the incorrect car models and the extra car inventory that is so harmful to the car industry.  There is no other industry where the swing in the price of an outside substance — not under the control or predictability of the car industry — affects the demand / value of its product so much.  Here’s what I heard from the CEO of Auto Nation at the WSJ:EcoNomics conference — when gas prices went from $2 to $3, to $$ and then back down to $3 and then $2 last year, he said that the value of a used Prius went from $15,000, to $20,000, and then to $25,000 at $4.  Then it went back down to $20k, and $15k on the way back.  It was completely symmetric on the way up and down and swung $10,000 (or more than 40% in value) just by a $2 swing in gas prices.  Think about this.  You are a car company planning to invest $1B or $2B to make your car making decision 3-4 years out and there’s something you don’t control that can make the value swing more than $10,000, or more than 6x your profit on that product!  That’s insane, and unsustainable, and in fact, look what happened in that experiment.

Therefore, I think that it’s not even price of gas that matters, it’s just knowing with some stability what it will be, and if you took the current $50/barrel and just slowly phased in a $5/barrel floor increase, so it would be $70 in a year, $90 in two years, and so on, that would give an underlying hugely valuable signal to the market (both customers AND manufacturers).  Let me know what you think of this idea.

Thanks,

Bill