From a note sent out this morning by Harm Bandholz, U.S. economist for Italo-German bank UniCredit:
[O]il-exporting countries have been continuing to channel the bulk of their petrodollars via London to the US … With rising oil prices, net purchases of US Treasuries made by the UK soared to USD 205 bn during the last 12 months. What makes this number even more impressive is the fact that during the same period, net purchases of US Treasuries by all foreign countries added up to USD 208 bn. Hence, 99% of all foreign purchases have been done by the UK and most of them were oil-related.
Interestingly $205 billion is also in the vicinity of the size of the federal budget deficit ($163 billion in the fiscal year that ended in September, probably bigger this year). So the Russians and the Gulf states are effectively financing our federal deficit with the dollars that we send them to buy oil.
What if we had chosen instead to close that deficit by levying a $1.50 per gallon gas tax? At current consumption levels that would generate $213 billion a year. The tax would presumably drive consumption down a bit, so let’s say $180 billion. Enough to turn the deficit into a small surplus. Meanwhile, lower U.S. consumption would presumably drive global oil prices down a touch, and an in-balance federal budget would mean less downward pressure on the dollar–a major factor in the current spike in oil prices. So gas wouldn’t cost that entire $1.50 extra per gallon (I have no idea how much more it would cost, though). That higher price would in turn increase the economic incentives for consumers to buy fuel-efficient cars and for car manufacturers and entrepreneurs to find for oil alternatives, thus reducing long-run demand for (and the long-run price of) oil.
That strikes me as a markedly better situation to be in than the one we’ve got, in which we have to worry about oil exporters deciding to shift their central bank reserves and other investments out of dollars, which would further depress the dollar (and thus further increase oil prices for Americans) and probably raise the interest rates the government has to pay on its debt. Fiscal responsibility actually does have its rewards.