Energy choices facing policymakers call to mind a Frost poem. There are two approaches to address pain caused by high gas prices, and reason should compel us to take the one less traveled.
The first path, one well travelled since the first embargo in 1973, involves government planning and subsidies. If this worked, we wouldn’t be facing our current problem — at least it wouldn’t be as severe.
The second, far less warn path is to put more emphasis on market forces and energy realities.
Ratcheting up CAFE standards as well as subsidies for electric and hybrid vehicles and biofuels have failed to reduce our country’s use of gasoline. What they have done, however, is raised the price of personal vehicles and take taxpayer dollars and transfer them to rent-seekers and special interests. The current CAFE standards are estimated to raise the average price of a vehicle by $1,000 or more. Additional mileage is not cheap and the higher mileage vehicles tend not to be the ones that American families prefer.
Every serious study of energy and transportation concludes that oil will continue to be the dominant transportation fuel for decades to come. That is a result of its abundance, versatility, energy content, and cost. Even at today’s high crude oil prices, traditional fuels remain cheaper than alternatives.
An energy policy based on energy realities would be far more effective than one based on wishful thinking.
Among the number of reasons for the recent spike in crude oil prices, the dominant one is demand from China, India, and other Asian nations. The price of crude oil is set globally, so strong demand outside of the OECD puts pressure on prices.
Though they act otherwise, there are limits to what politicians can do — especially in the short run. The recent drop of crude prices below $100 was directly related to the strengthening of the U.S. dollar and further evidence that our recovery is anemic. More robust economic growth will put upward pressure on prices unless we decide to produce more.
Ten years ago, the Bush Administration introduced a number of energy proposals, most of which were ignored. If serious action had been taken at that time to increase our domestic production, we could possibly be producing almost 2 million additional barrels daily. Though that would represent less than 3% of global production, it would have a damping effect on prices.
If there was a serious attempt to deal with our debt and deficit problems, investing in companies that provide goods and services might look more attractive than speculating in commodities like crude oil.
Certainly the current proposal for discriminatory tax treatment of oil companies will do nothing to encourage more domestic investment. Indeed, if those proposals were enacted, prices would be higher, less domestic oil would be produced and the hand of national oil companies strengthened.
That makes no sense.
Proponents of electric vehicles and hybrids turn a blind eye to the fact that these vehicles are not ready for the commercial market without subsidies and sustained high prices for gasoline. The subsidies make even less sense at a time of large deficits.
The solution to our oil problem, which is not a foreign oil problem, is fairly straightforward. Produce more at home, encourage R&D into alternative fuels and vehicle systems, discontinue market distorting subsidies, and place more trust in market forces.