Gasoline Prices

The problem with gasoline prices is not that they have been too high this summer, but that they have been too low for the past two decades. American drivers do not want to hear this hard truth, and American politicians are making matters worse by playing the blame game and proposing silly solutions that will make matters worse.

This is not the first time we have experienced a sudden jump in gasoline prices. In 1977 oil prices shot up to more than $20 a barrel in response to increased demand and OPEC's policy of limiting supply. This caused long lines at gasoline stations, and for the first time in history gasoline prices exceeded $1 a gallon.

Eventually, higher prices changed behavior. People purchased smaller, more energy-efficient cars, insulated their homes, set their thermostats lower in winter and higher in the summer. Businesses responded even more rapidly to signals from the market by conserving energy and offering more energy-efficient products. When reduced consumption broke OPEC’s stranglehold and oil prices fell to $10 a barrel, most people, especially car buyers, became complacent; America once again behaved as if cheap energy would last forever.

An intelligent energy policy should have as its principal goal not reducing oil prices but reducing oil consumption. During the past two decades, for example, the government should have increased taxes on oil and gasoline in order to keep prices up and consumption down. If it had done so, we would not have so many gas guzzlers on the highways today. The policy of cutting gasoline taxes in response to higher prices is political pandering at its worst and simply encourages OPEC to raise prices further.

There are three reasons why cutting oil consumption is important:

First, the world’s supply of liquid petroleum is finite. Economists debate how long oil supplies can last at our current rate of consumption, but it is clear that our grandchildren are going to be caught short. We cannot continue to consume resources as if we have no responsibility to future generations.

Second, national security demands that we reduce our dependence on foreign oil. American soldiers died in the Persian Gulf war not only to stop a tyrant but also to protect our oil supplies. The less oil we consume, the less likely we will have to send troops into the Middle East to protect our economic interests.

Third, oil consumption (and the consumption of other fossil fuels) must be reduced because of the danger of global warming. While some debunk the scientific studies showing an increase in temperatures and carbon dioxide levels during the past century, can we really risk melting ice caps and global disaster while we enjoy cheap energy?

Besides cutting gasoline taxes, there have been other counterproductive solutions proposed by politicians. Farm state politicians want to subsidize ethanol, a product that shows no sign of ever being cost-effective or energy-efficient. Politicians from oil-producing states favor increasing domestic production and reducing oil imports. At first blush, this sounds patriotic. In fact, this policy enriches domestic oil producers, who are generous contributors to political campaigns, and is an unpatriotic “drain America first” program that will make us more dependent on foreign oil in the future, after we have consumed our domestic oil supply.

Some government programs have helped—for example, requiring energy-efficiency labeling for equipment like refrigerators, air conditioners and furnaces. This has given consumers the information they need to make intelligent purchases. Installing insulation and energy-efficient equipment in government buildings and public housing has also been cost effective. Mandatory fuel efficiency standards, however, have been ineffective, because Congress has blocked their application to sport utility vehicles, minivans and pickup trucks—nearly half of all vehicles sold.

What would be a good energy policy for the United States today? Ideally, we should begin to raise oil prices slowly until they are closer to those in Europe. For example, if oil prices were raised through taxes by two cents a gallon each year for the next 25 years, business and consumers would make purchases and plan accordingly. The revenue from these taxes could be recycled into the economy through income tax cuts (for example, by increasing the earned income tax credit and the standard deduction) that would make up for the regressive nature of gasoline taxes. Meanwhile research must increase on energy efficiency and alternative forms of energy that will not contribute to pollution or global warming.

Unfortunately, the United States missed an opportunity over the last two decades to establish a sensible energy policy. Will this year’s candidates face the energy crisis and talk honestly to voters about it? Don’t bet on it.