We Can Only Dream About Low Gas Prices, Independence
Tuesday, February 10, 2009
The Indianapolis Star
Monday, Feb. 10, 2009
Opinion column by: Peter Grossman, Clarence Efroymson Professor of Economics
So Sen. Richard Lugar wants to raise the gasoline tax by $1 a gallon. Good luck with that one. Judging by the comments to Matthew Tully's recent column touting the plan, there would be a lot of angry people if such a tax were enacted.
In the context of serious tax reform, I can see an argument for a large gas tax. But people shouldn't worry. It seems highly unlikely that politicians would ever vote for any gas tax, much less a large one. Even President Bill Clinton's 4.3 cents-per-gallon-tax increase of the 1990s cost Democrats seats in Congress after it passed.
But Lugar has shown us the real problem with American energy policy. People want two things: low energy prices and energy independence. The problem: first, they are contradictory goals; second, neither is feasible. Lugar is to be commended for at least trying to come to grips with this contradiction. But I suspect he's fighting a losing battle. The Obama administration seems ready to push an energy plan that includes hundreds of provisions, costs billions of dollars and focuses on some wasteful alternative energy panacea; in other words, the same kind of stuff we've been getting for the past 35 years.
How are low energy prices and independence contradictory? Well, think of what it would take to get low prices. We would need to encourage drilling, and not just here because much of our oil is expensive to tap. We'd need to give oil companies incentives to drill everywhere and especially in places where oil can be produced cheaply. Like the Middle East. Russia. Central Asia. Of course, that would make us more dependent on imports than we are now.
And how do we get independent? Make the price really, really high. Lugar's proposal is a very small step. Let's try $12 a gallon. That would cut down on usage drastically.
Yet neither of these ideas would achieve its intended goal. The price of oil and gas will go up again. And with equal certainty it will also come back down. It is a world market that responds to political developments, natural disasters and changes in supply and demand. When the world economy recovers, so will world oil demand and prices will start to rise.
When they do, it's hard to imagine Congress leaving even a $1 gas tax in place. If $4 gasoline could be reduced to $3 gasoline by an act of Congress, who doubts that most legislators would go for it?
Meanwhile, the energy independence goal also is not feasible. People, especially politicians, have no concept of how massive and economically damaging even an attempt at independence would be. Moreover, all oil will still be priced in world markets subject to the same forces we face now.
Because of these contradictions, U.S. policy has centered on technological fixes, innovations that might give us low prices and make us independent at the same time. So we bet large sums on technologies that never go anywhere.
The latest fix is the electric car. President Barack Obama says we should have a goal of 1 million of them on the road by 2015. A big tax break is supposed to get us there.
This is just like Jimmy Carter's old plan to boost solar hot water heating. In 1977, he persuaded Congress to give tax breaks that would, by his reckoning, put 2.5 million solar hot water systems in homes by the mid-1980s. The goal wasn't even approached, much less achieved. By the late 1980s, more solar hot water systems were being removed from homes than added to them.
The electric car will cost more than comparable cars even with a tax break. And with the gas at $2 gallon, it would take many years to make up the difference. But consumers also want to know: Will they be reliable? Easy to repair? Easy to operate? As the solar story showed, people need more than government support to spend thousands of their own dollars.
There's little reason to put any faith in government energy panaceas. But Lugar's tax wouldn't solve energy problems either. No matter the policy, we will get high prices (as well as low ones) for energy, and we will continue to be dependent on others.
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