Baseball Crank
Covering the Front and Back Pages of the Newspaper
April 26, 2006
POLITICS: All About Oil: A Short and Long-Term Energy Strategy

Gas prices are high, very high, and keep getting higher. The fact that they are still much lower, in inflation-adjusted terms, than they were in the late 1970s is not much solace to the average consumer suffering from sticker shock at the pump. We need a short- and medium-term strategy to lower prices of crude oil and retail gasoline and a long-term strategy to replace oil as the principal source of energy for transportation (there are already competitive alternatives for home heating and industrial production).

High crude oil prices in the world market and high retail gas prices in the United States are bad policy and bad politics for four main reasons:

1. Bad for the economy. People travel by car, and if gas prices go up they travel less. Goods travel by truck and by plane, and if gas prices and jet fuel prices go up that has a ripple effect on inflation throughout the economy. Overall, the high cost of oil and gas is a choke point that acts as a drag on economic activity.

2. Bad for consumers. Lots of people - indeed, the majority of American adults - drive cars and buy gas. High gas prices hit them in the pocketbook. Government doesn't exist to solve every economic problem or every bite on the family wallet, but when the economy as a whole and lots of individual consumers are feeling a pinch from high gas prices, the government should at least take a look in the mirror and start by asking what it's doing to exacerbate the problem.

3. Bad for national security. High crude oil prices mean lots of profits - not for oil companies that refine and market gasoline but for the owners of the oil as it comes out of the ground. Yes, that includes American and European oil companies and friendly powers like Iraq, Kuwait, Canada, Mexico and Norway. But it also includes an awful lot of governments that range from the unstable or semi-dysfunctional (Russia, Nigeria, Kazakhstan) to passive-aggressive hostile and subversive (Saudi Arabia) to openly hostile (Iran, Venezuela), and the stream of oil revenue - because it depends so little on the existence of free people and free markets - often winds up propping up despotic or corrupt regimes and financing terrorism, extremism and the development of weapons of mass destruction.

4. Bad politics. From a Republican perspective, people are upset at high gas prices, and with a Republican House, a Republican Senate, and a Republican president and vice-president who spent years working in the oil business, people are - fairly or unfairly - going to blame Republicans for high gas prices. In fact, the case has been made that President Bush's approval rating is closely tied to gas prices (for a dissenting view, see Gerry Daly here).

The answer is not trumped-up investigations or tax hikes that cripple American oil companies while giving a free pass to the Iranians and the Venezuelans. The fact is, American oil companies aren't even all that profitable compared to other industries, and really the last thing we want is punitive measures that just outsource even more of our energy production and make us more dependent on foreign concerns. The answer, instead, is doing something that will actually cut prices, now, and do something to put downward pressure on them for the foreseeable future.

So, how do we solve the problem? I don't have all the answers. But a few things seem obvious.

High prices are generally a function of three things: too little supply, too much demand, and too many taxes. The one we can affect most easily in the short run is the third: cut taxes at the pump. The intermediate-term strategy, which will cut prices and reduce profits to rogue-state oil producers, is to increase domestic supply. The long-term strategy, because it's the hardest to change without corresponding disruptions to our economy and culture, is to reduce demand through alternatives to oil.

1. Cut Taxes at the Pump.

Republicans are, after all, supposed to be the party of low taxes, especially low taxes on people who work for a living. And people may not realize this, but few things in this country are more heavily taxed than gasoline. As RedState diarist Mark I pointed out in calling for a cut in gas taxes last week:

The federal per gallon gasoline tax is 18.4 cents. Together with local and state levies, fuel taxes make up about 45.9 cents per gallon, according to the Tax Foundation. In fact, tax receipts from the various fuel taxes outstrip oil industry profits in most years.

Let's repeat that last point (more here): the government makes more money from each tank of gas than the oil companies do. If Republicans, whose lifeblood is combatting the high price of government, can't or won't educate the public on the fact that high gas prices include taxes that range as high as 62.9 cents/gallon in New York, 52.4 in Michigan and 49.5 in Pennsylvania, then we really have lost our way.

Now, I understand that the gas tax is, in the grand scheme of things, one of the less-bad taxes. While it is a regressive tax and one that serves as a choke point to economic activity, it also helps push us in the long-term direction of encouraging switches to other energy sources, it is at least theoretically avoidable (although most commuters and families don't have a lot of leeway to avoid driving), and as currently designed, the tax is tied more closely to related spending (on highways, mainly) than your typical general-revenue tax. All fine macroeconomic points, but the fact remains that it's a tax that's hitting people hard right now, it's paid by the vast majority of voters, and - as is true of the estate tax, another of the generally less-bad of federal taxes - you don't get many political opportunities to tear a tax out by the roots. Republicans should take that opportunity when they can, and force Democrats into their usual position of defending high taxes - and high gas prices - and have an electoral winner on their hands, doubly so by calling on states to follow suit. Indeed, some Democrats have already sensed the political opportunity here: New Jersey Senator Robert Menendez has called for a temporary cut in gas taxes (via Instapundit), although he appears to be looking to pay for the cut in part by raising corporate taxes on U.S. (but not foreign, obviously) oil companies, instead of cutting spending (although he does propose cuts in one corporate-welfare program that at least sounds like a good idea). Support from a few other endangered Democrats could make a tax cut at the pump a political reality in a hurry.

2. Pump and Refine More Oil

This really should be a no-brainer: when you're too dependent on foreign automakers, you try to develop a domestic car industry. When you're too dependent on foreign airplanes, you try to develop a domestic airplane industry. When you're too dependent on foreign steel, you try to develop a domestic steel industry.

So, why not try procuding more oil here at home? President Bush's plan already calls, yet again, for drilling in the Arctic National Wildlife Refuge - with oil a vital economic and national security issue, this ought to be a front-and center subject for repeated up-or-down votes in the Senate, and Democrats should have to answer: would FDR have refused to drill for this oil when people are hurting from high gas prices and high oil prices are financing our enemies? Pat Cleary goes further and suggests we should also be tapping more of the potentially massive reserves in the Outer Continental Shelf, something Fidel Castro is already beating us to. And, as much discussed, environmental restrictions have prevented the US from opening a new oil refinery in the past 30 years; we need to have more refining capacity. None of these steps will cut oil prices tomorrow the way a tax cut could, but each of them could aid in cutting prices over the next few years.

3. Demand: Incentivize Alternative Fuel Sources

We've been hearing calls for reduced demand for fuel for years, but let's face it: U.S. car culture is a good thing and not going anywhere, and you really only need to travel a little bit outside of the Northeast - or look at a map - to understand why. Anyway, government crusades against demand usually don't work, whether they be anti-cigarette ads, throwing boozers and potheads in jail, or putting a cardigan on the president. If we're going to live in the real world, the long-term answer to the demand problem has to be about making alternatives cost-effective.

Now, I'm no expert on the science and technology of what is and isn't a practical alternative fuel source (Larry Kudlow thinks we should cut tarriffs on imported ethanol, which sounds like a good idea but as with President Bush's enthusiasm for ethanol and hydrogen I have no idea if it's a practical alternative). Certainly some of the President's micro-solutions, including tax credits for hybrid vehicles, are potentially a start.

But I do know this: investments in R&D don't come mainly from R&D tax breaks. The goal here should not be to turn alt-fuel boondoggles into corporate tax shelters. No, as those of us who lived through the dot-com boom of the late 90s well recall, what investors want most of all is to be the first ones into a mass market. And the best way to incentivize successful R&D, to get companies to put real resources and their best people behind it, as we've seen in the pharmaceutical industry, is to give companies the ability to make BIG money at the end of the research trail. That means:

*Extend or expand patent protections for alternative fuel sources.

*Pass legislation guaranteeing multi-year tax exemptions for profits on alternative fuels - and make clear the legislative intent to encouarge reliance on that exemption, such that it can't be repealed in the future without payment of just compensation under the Fifth Amendment.

*Stop harrassing the oil companies. Investors who see today's energy producers subjected to grandstanding hearings, investigations and "windfall" taxes will get the message that being a profitable business in tomorrow's fuel source will bring them all the same headaches some day.

It may be objected that this is rolling out the red carpet to alt-fuel monopolies. But the alt-fuel producers will still have to break into the market in competition with gas, and as we've seen in the internet and pharma businesses, a short-term monopoly (even a patent-protected one) can still crumble once the market matures and generic substitutes are allowed in. Frankly, the prospect of an alt-fuel gold rush is exactly what we want to produce.

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I don't pretend to have covered every angle of the energy quandary here. But this three-pronged strategy - cut taxes in the short run, increase domestic supply in the intermediate term, and encourage the private sector to see big profit potential in creating substitutes that will dampen long-term demand - is both good policy and good politics for Republicans who want to show leadership in battling high gas prices and a world of dangerous oil producers.

Posted by Baseball Crank at 8:49 AM | Politics 2006 | Comments (21) | TrackBack (0)
Comments

Crank,

I'm with you on the last proposals, but isn't the first actually counter-productive? First, gas taxes actually are too low, since gas prices are not consistent with the externalities created by gas usage (principally: pollution). So, as a matter of policy, gas taxes are good. But, more important, cutting taxes on gas is completely inconsistent with switching to an alternative fuel.

Most Republicans agree that taxes are a bad thing and that "starving the beast" is worthwhile even if it causes short term pain in the form of diminished services. That is, Republicans should be willing to take some political hits to avoid raising taxes. Shouldn't the same analysis apply to gas? If we want to reduce our addiction to gas, shouldn't we be willing to tolerate some short-term pain -- which, as I understand it, would be significant, but not catastrophic -- so that we can actually wean people off petroleum based fuels and let the market encourage consumers to make fuel efficient choices (like not purchase SUVs).

I'm not sure political gain is enough to justify this.
-Michael

Posted by: mjs at April 26, 2006 11:15 AM

US gas taxes are extremely low compared to Europe. There are a lumtitude of issues causing gas prices to spike and I agree that there should be some short term fixes, but nothing that jeopordizes a long term solution. Government meddling in the industry has caused enough problems already and taxing profits does nothing but hurt us in the long run b/c if these companies can't use the profit to reinvest in the aging refineries we will have even greater supply shortages later. And ethanol is not a solution. It is merely used as an additive in gasoline (approx. 2% of the finished product).

There are multiple factors effecting the price of gasoline such as the replacement of MTBE with ethanol. There is simply not enough ethanol production at this point so it is a high cost item, not to mention the costs of the transition process. Plus, because it is a cousin to moonshine or alcohol, it cannot be shipped via pipeline so transportation costs are higher. Then there is the tight line between refining capacity and demand, which is even tighter b/c of all of the planned and unplanned shutdowns across the nation (the gulf coast is still not 100%) Then there are the new clean fuels regulations lowering the sulfur content on gasoline and diesel. Then there is the rising cost of crude, which gets factored in before you even get to the refineries. That is the big ticket item. There are other factors as well, but ultimately when crude oil is closing in at $80 a barrel and people were scared a couple years ago when it was at $40 a barrel there is going to be a dramatic rise in cost. Don't be fooled by government posturing in a election year, no one in D.C. is going to solve the world's energy crisis by taxing profits or lowering environmental restrictions. Bush has stopped filling the strategic reserve, which in theory frees up more barrels on the market, but its not many when you look at the global picture.

Posted by: Phanatic at April 26, 2006 11:47 AM

2nd time as farce...

driving since '68

Posted by: anon at April 26, 2006 1:43 PM

Phanatic makes some excellent points about fuel additives and shortages. There is a balkanized market when it comes to gasoline in this country (different government mandated fuel / additive mixtures) which contibutes to the 'boutique' refining decisions made by refineries to meet the demand of the national energy market. And while it is true that the NUMBER of refineries has declined in the last 30 or so years, the EFFICIENCY and CAPACITY of refineries has increased.We often here that oil is a fungible commodity, but refined products are not, and the refining of multiple products is what is causing the spot shortages.

Markets will eventually find the proper equillibrium price for petroleum, and I would guess that is substantially lower than the current levels. But, using high taxes to increase the cost to consumers will do little to help customers switch to alternatives, without VIABLE alternatives. The truth is that there are no alternative fuel sources that combine the efficiency, unit energy and low cost of petroleum products, even at today's prices. Until that happens, we will all just end up paying more.

Posted by: vhf at April 26, 2006 1:57 PM

The fact that US gas prices are lower than other parts of the world and the arguement that people should change their lifestyle don't pass muster here.

The arguement that because other pay higher taxes we should too is laughable. The countries referred to have 2x-3x our unemployement rate and their economies lag way behind our and for good reason...BECAUSE THEIR TAXES ARE TO HIGH!!!! It is well documented in even low level Economics classes, taxes hurt economies.

Go check the effect on tax cuts to government revenues. That information is availalbe on the internet. Everytime taxes have been lowered, government revenues have gone up. Proven fact. Why? Because when taxes are lowered it puts more money in citizens pockets and whether they spend it or save it it benfits the economy.

As for people changing their personal habits...who are you to tell me what kind of vehicle I should drive. Unless you are buying it, it is none of your business. One of the biggest problems in our country today is people trying to stick their noses into other peoples business. Warning, sticking your nose into the business of others can be hazerdous to your health. Kind of like walking through the door of my house after dark uninvited. Don't forget the corks to fill the holes and don't bother bringing little ones.

Posted by: maddirishman at April 26, 2006 2:17 PM

Lowering gas taxes should have no effect in the short run. The short run supply of gasoline is pretty much set; the short run demand for gasoline is pretty much set. Gas prices are determined from where quantity supplied equals quantity demanded. Since neither of those variables change in the short run, neither will the price at the pump.

What would happen is that gasoline producers would make more money and the government would collect less. Cutting gas taxes is almost always proposed as a short term solution, but it's only effect is to possibly increase the incentives for extracting and refining oil. That helps in the long term, but will provide no help in the near future.

Now, if gas companies can ramp up production enough to affect prices before the next election, then it makes political sense to do it. I don't know what the turn around times for production increases in the oil industry are, but with refining currently running at about 90-95% capacity (percents from memory; they could be off), I think they have to be greater than six months.

Posted by: Brad at April 26, 2006 3:13 PM

1) Raise the EPA milage standards - they actually encourage Detroit to keep making obnoxious gas guzzlers. The heavier the vehicle the lower the allowable mpg. What a joke!! This ignorant policy has also lead to Detroit's downfall because only Americans want these behomoths and fewer of us do everyday.

2) Raise the Gas Tax - Raising the the mpg will alone probably lead to a lot more driving unless we counter it with a disincentive. I hate paying taxes too, but we can send our money to Washington or Tehran. I pick Washington.

Do you know our involvment in World War II began because of gasoline shortages resulting from an expanding Asia? The Japanese bombed Pearl Harbor because we cut them off from the world's oil market.

Thirty years later our country went into a tailspin because of the Arab Oil Shock.

Now in 2006 we're still at the mercy of fossil fuels. There's no excuse.

One final point: During the 2000 Presidential election, GWB mocked Al Gore for suggesting alternative fuel sources. He yukked about how ridiculous it would be to replace the combustible engine as the primary source of power in this country.

And we wonder why we're paying $3.00 a gallon.

Posted by: patrick at April 26, 2006 11:06 PM

If we stopped using combustible engines they would last longer.

If we solved our lumtitude of problems we would get new ones.

Posted by: M. Simon at April 27, 2006 1:12 AM

Crank, I like you; but this time you've gone off the deep end. It is an election year and gasoline prices are rising. One can expect, and we are getting bonehead proposals from scared Congressmen. They are scared and should be so because they have spent the last two years running up the deficit with bridges to nowhere and other pork projects whilst ignoring the nation's real problems. If George W Bush has any respect left, he blew it with his idiotic responses to this "crisis". It is a sad day when Bush can correctly be compared to Al Gore.

Lowering or eliminating gasoline taxes would contribute to a recession since those revenues go directly into highway repair and construction. How long would our economy continue if roads and bridges start falling apart and lots of constructin workers are jobless?

BTW, do you know that if Fidel is drilling offshore, he is doing so in almost the same continental shelf that in Florida Jeb Bush wants to keep from drilling?

Any competent economist would tell you that people will adopt alternative fuels when their price (assuming availability is part of 'price') falls relative to the price of conventional fuels. Let the market do the resource allocation. If the price of gasoline rises you'll see people become interested in alternatives without needing blowhards in DC telling them about it. Do you really believe that Congress, including the GOP, especially the GOP, can be trusted to pick exactly the right alternative fuels to subsidize or to find an effective subsidy that does not involve pork-barrell spending?

End the restrictions on imports of alternative fuels and impose a tarrif, better yet a ban, on oil imports from dodgy countries like Venezuela and Iran.

Posted by: jimbo at April 27, 2006 5:49 AM

Jimbo:

RE: "Any competent economist would tell you that people will adopt alternative fuels when their price (assuming availability is part of 'price')"

What about when costs associated with the good aren't borne by the buyer - costs such as pollution, congestion and weakened foreign policy.

You should have read Chapter 2 in you're Econ 101 textbook.

Though I do agree with you that Crank is misguided in thinking the government should pick and choose technologies.

Instead, raise the gas tax and the milage standards and let the market take it from there.

Posted by: patrick at April 27, 2006 9:04 AM

What everyone seems to miss in all this mess (the miss mess?) is that oil is far too valuable a commodity to waste on things that burn it for movement and power. It's needed for plastics and other products that also have no substitute.

Gasoline was picked a century ago to replace the horse and buggy, since it was found that it was reasonably cheap (and still is for what it packs), is reasonably safe, and fairly inert until it is ignited for its intended purpose. Oil for power plants the same.

Battery technology has not caught up with its needs, and might not. It might be considered analagous to chemical rockets when you need ion or nuclear powered ships (anyone rememember Project Orion? or Nerva?) to reach the outer planets.

So what we need to do, and the marketplace probably is the best way to do it, is to figure out how to finally replace what is becoming an outmoded technology. Just as hitching a wheeled vehicle to a horse became too slow, now the idea of pumping a gooey liquid out of the ground, sending it halfway around the world in a serious of very large ships to be refined, then sent out again in various products is no longer a feasible option. Marketplace? Well, Exxon/Mobile, Toyota and a few others are far more capable of doing this kind of work. They are, after all, energy producers and users. They use oil to provide the service they deliver. They want to keep profitable, it's in their interest to find a way to keep up.

I'm not a scientist, so to say I have feasible suggestions is probably not reasonable. But much as various types of engines were tried with cars and planes (Steam, coal, electric, and finally, settling on gas and diesel as the most reasonable compromises), we have to do another wave of energy making devices. We went from people to ox to water to steam to coal to oil and in some cases nuclear. So the options have to be revisited again: from cold fusion with disposable innards (thank you Daniel Bussard), to a space beanstalk with solar panels (and cheap space travel), who knows. But to keep an economy, now world wide, growing with a source of energy that is as finite as oil seemes economically stupid.

Posted by: Daryl Rosenblatt at April 27, 2006 9:58 AM

Admit it Daryl, you're just a paid shill for the space beanstalk lobby ;)

Seriously, good point about plastic.

Posted by: The Crank at April 27, 2006 10:30 AM

patrick - you can't say in one breath not to pick and choose and then say raise the gas tax.

My point on new technologies is: don't keep handing out tax breaks for R+D - that is picking and choosing. Instead, incentivize only the stuff that works, by enhancing the profit-making that comes from having marketed something successsfully enough that you made money off it.

jimbo - You can't boycott Iranian or Venezuelan oil - oil sells into a world market. You only stop them by invading or totally blockading them, neither of which is a good idea (we may need to go to war with Iran anyway, but oil isn't the reason).

Posted by: The Crank at April 27, 2006 10:43 AM

Good one on the plastic, Daryl. Every once in a while I wonder about that myslef, and then forget to follow up on it. You're the first person I've seen mention it. And I am sure it is worth mentioning...

Posted by: Mr Furious at April 27, 2006 11:06 AM

I understand we have an extremely high tariff on Brazilian Ethanol (from sugar cane), which is apparently very efficient and is making them energy-independent. I'm guessing we're doing this to protect our own wasteful ethanol industry for GOP votes. Getting the government OUT of the way would appear to be the better way to get us off the "Middle East teat."

Posted by: tsmonk at April 27, 2006 1:04 PM

RE: "you can't say in one breath not to pick and choose and then say raise the gas tax."

I guess you're saying that through the gas tax we are somehow subsidizing all other modes of transportation.

First, the gas tax is actually a completion of the sale; it charges consumers for the associated costs of burning a gallon of gas. This is not a penalty -- its really just leveling the market.

Second - By leveling the market through the gas tax, we will encourage a wide range of alternatives: smaller cars, more public transportation; people living closer to where they work; more telecommuting; carpooling; walking/bikeriding (god forbid).

None of those even require any technological advances I am not sure how we could tax them.

When/if alternative fuel sources are introduced, then we can talk about what tax they should face to "complete the sale.."

Posted by: patrick at April 27, 2006 2:13 PM

I disagree with Patick's suggestion that the gas tax from the government is "a completion of the sale." I support public transportation, but it is not a viable alternative for many Americans who live outside of a major metropolis. I am sure many of the readers on this site are from nyc or the area, but most Americans are not and they do not have anything close to the public transporation system that NJ Transit and Metro North and the subway abd bus system provides. If local government wants to get serious, a good and relatively small first step, would be to gradually phase out diesel engined public buses and school buses for an electric or hybrid engine. It could be a federally subsidizes program and give the automotive industry a true incentive to produce a cleaner and more fuel efficient engine without the general public taking on the burden of paying for it when buying a new car.

I also think an interesting study would be to see how different people's viewpoints were on the rising proce of gasoline and opinions about how the problem could be solved by breaking down where people live. Some results would be pbvious and I can't think of anyone that pays for gas liking this, but I am sure viewpoints greatly differ in say Manhattan where most residents do not own cars and let's say LA where many people drive to work as opposed to taking public transportation.

With very few exceptions, public transportation is not an acceptable alternative to driving your car. However in the supply and demand market that we live in, it is important to look at ourselves as consumers on how we use energy. Gas prices will continue to rise since supply is tight, until people stop driving as much. Look at jet fuel prices after 9/11. Everyone was afraid to fly and the price went down. That is a dramatic example, but you get the point.

It is necessary to have an educated debate about nuclear energy and include that in the alternate fuels debate. Liguified natural gas (LNG) also has to be discussed. There is plenty of US owned wells to supply us with natural gas for energy consumption in power plants. It does nothing to simply tax oil companies b/c that is money that cannot be reinvested into the existing infrastructure.

Posted by: Phanatic at April 27, 2006 3:34 PM

Daryl-

Let me third the kudos on the plastics comment.

Did you have a small role in The Graduate?

Posted by: Mike at April 27, 2006 4:03 PM

The funny thing is I have a very good friend in the plastics biz. And I did belong to the Planetary Society many years ago. So what the hey! Let's build a beanstalk. As Heinlein said, when you are in earth orbit, you are halfway to anywhere.

And with the price of gas going up, I'll bet those clowns in the Hamptons won't complain now if they see a windfarm off in the distance. At least, now, nobody will listen.

Posted by: Daryl Rosenblatt at April 27, 2006 11:14 PM

The replacement of ethanol for MTBE was the major cause of the price hike. And the people and politicians are into complaining about the oil companies making huge profits and that is the reason behind the price rise. I don't understand why the politicians are into misleading the people rather than finding the real cause behind the problem and suggesting solutions to the real problem.

MTBE is causing contamination. I agree to that. But going for an MTBE LITIGATION against them is outrageous. The idea of government taking up half of the expense of the clean-up cost of MTBE sounds good.

Any one who is really interested in the issue can of course contact me ( whitfieldjake@yahoo.com) or can follow the link MTBE LITIGATION

Posted by: Jake Whitfield at July 15, 2006 3:22 AM

iam annoyed by the MTBe conspiracy. The government making fool of the people should not be allowed. React now.


GET back to my blog http://mtbe.theblog.cc.

We’ll discuss on anything and everything related to MTBE

Posted by: Jean Claude at July 21, 2006 5:43 AM
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