Tax and Drill
By Charles Krauthammer
Friday, May 21, 2004; Page A25
In the mid-1970s, the twilight of America's oil innocence, the average new American car was a monster weighing 4,000 pounds. The oil shocks induced belated rationality into American oil habits. By 1981 the average car was down to 3,202 pounds.
By the mid-'80s, rational consumer reaction to high prices -- home insulation, fuel-efficient appliances and lighter cars -- had actually solved the energy crisis. We had OPEC on the run. In July 1986 oil plunged to $7 a barrel.
It is now $41 a barrel. We had a golden moment, and we let it pass. The way to lock in our gains then would have been to artificially raise the price of gasoline with a tax that would depress consumption, maintain consumer demand for fuel efficiency and, most important, direct much of the pump price into the U.S. economy (via the U.S. Treasury) rather than having it shipped to Saudi Arabia, Russia and other sundry, less than friendly places.
Nothing, of course, was done. It was morning in America, and no politician ever got elected running on higher gasoline taxes. Americans got used to low oil prices again. Consumers once again acted rationally: The average car is now back up to 4,000 pounds.
Pump prices have once again soared. Surprise.
This has occasioned a festival of cynicism. Democratic National Committee Chairman Terry McAuliffe blames higher prices on an administration that is "in the pocket of big oil." John Kerry blames Bush for not pressuring the Organization of the Petroleum Exporting Countries. Kerry promises to "stand up to those OPEC nations and say, 'Enough.' " Oh, that'll do it.
Kerry has another plan, too. He wants us to stop filling the Strategic Petroleum Reserve. This is not just a bad idea -- the SPR is there for some catastrophic event, say a terrorist insurgency in Saudi Arabia that interrupts supply and could wreck the U.S. economy. It is also a transparent pander. Kerry's suggestion would have a negligible effect on gasoline prices.
This finger-pointing is utter nonsense. Why are gas prices up? Well -- surprise again -- demand is up and supply is down.
First, China's enormous economic growth is raising demand -- and prices -- for all kinds of commodities from steel to cement to oil. Until the late 1990s, China was a net energy exporter. Its newly developed appetites will now be putting pressure on energy prices for decades.
Second, the low oil prices of the '80s and '90s gave us an epidemic of gas-guzzling tanks on wheels. Americans have every right to shop for groceries in vehicles built for hunting elephants, but then they should stop whining about the inevitable oil price crunch that follows. Especially when they drive their SUVs to environmental rallies to prohibit drilling in the largest untapped oilfield in North America because of an exquisite sensitivity for the mating habits of Arctic caribou.
There is no free lunch. As demand has risen, U.S. oil production has declined -- down 25 percent since 1985. Americans have every right to an eco-sensitivity that prevents drilling offshore, on federal lands or in the Arctic. But they should not be surprised when they end up dependent on -- and paying through the nose to -- Saudi Arabia, Russia and Iraq.
The fact is that for two decades neither party has distinguished itself on the issue of oil blackmail and price vulnerability. There is an obvious solution: Tax and drill. Democrats won't allow drilling, and neither party supports taxing.
The idea is for the government -- through a tax -- to establish a new floor for gasoline, say $3 a gallon. If the world price were to rise above $3, the tax would be zero. What we need is anything that will act as a brake on consumption. Since America consumes 45 percent of the world's gasoline, a significant reduction here would bring down the world price.
But the key is to then keep the tax. Indeed, let it increase to capture all of a price reduction. Consumers still pay $3, but the Saudis keep getting lower and lower world prices. The U.S. economy keeps the rest in the form of taxes -- which should immediately be cycled back to consumers by a corresponding cut in, say, payroll or income taxes.
Keep gasoline prices high and American consumers will once again start demanding and buying lighter and more fuel-efficient cars -- exactly as they did in the late '70s and early '80s. Prices will continue to drop, and the U.S. economy will capture the difference.
It's a perfectly virtuous circle. It requires only a modicum of political courage. Which is why it does not stand a chance of happening.
© 2004 The Washington Post Company