Why Gas Prices Are Too Low
By David Ignatius
Tuesday, June 1, 2004; Page A23
Let's imagine for the moment that the United States was a prudent nation and that its politicians, rather than pandering to the public appetite for cheap gasoline, decided to reduce the nation's dependence on energy from the volatile Middle East.
After America's annual Memorial Day drive-a-thon, the idea of such a rational energy policy may sound quaint. Millions of Americans hit the road this weekend in their cars, trucks and SUVs -- many of them doubtless grumbling about the 2004 "oil crisis" that has pushed gas prices well over $2.
It would be nice if politicians would tell these road-happy Americans the truth, which is that the energy situation will only get worse over the long run. And it would be nicer still if politicians proposed policies that would improve the energy efficiency of SUV Nation. But in America, there's a name for such politicians: losers. The reason the oil squeeze will only get worse can be stated in two words: China and India. As those countries become more prosperous, their consumption of energy will inevitably rise -- putting further pressure on the market. That has already begun to happen with China, whose growing demand sucked up the 500,000 extra barrels a day of crude that Saudi Arabia added to the market last year to compensate for lost Iraqi production.
Optimists hope that an easy way out of the energy crunch may be found in abundant cheap supplies of natural gas, but industry economists tell me that's wishful thinking. One Denver-based consultant says that recent price moves and merger valuations suggest a 50 percent or more rise in natural gas prices in the next three to five years. Liquefied natural gas may eventually help temper prices, but only if huge investments are made to store and transport it.
The people who make America's gas guzzlers know exactly what would force the country to deal with the energy crunch: higher gasoline taxes. A recent article by Danny Hakim in the New York Times had some astonishing quotes from auto executives. Ford chief executive William Clay Ford Jr. explained: "Every place else we operate, fuel prices are very high relative to here and customers get used to it, but they get used to it by having a smaller vehicle, a more efficient vehicle." GM's chief executive, Rick Wagoner, agreed: "If you want people to consume something less, the simplest thing to do is price it more dearly."
The European market illustrates how higher taxes push greater efficiency. Last week, premium gas prices in Europe were averaging more than double the U.S. level of $2.24 a gallon -- with prices at the pump averaging $5.07 a gallon in France, $5.36 in Germany and $5.59 in Britain. European consumers inevitably have demanded more efficient cars. According to Hakim, overall oil consumption has fallen in Germany and Britain since the 1970s.
The best plan I've seen for doing the politically impossible comes from an energy economist named Philip Verleger. He has spent much of his adult life arguing for a sensible increase in gas taxes. He first proposed such a plan in December 1973; the Ford administration considered the idea, then rejected it. He supported a 50-cent-a-gallon tax during the Carter administration; it got just 35 votes in the House of Representatives. He continued arguing for a tax hike through the 1980s and '90s and, as he says, members of Congress "just rolled their eyes." President Clinton finally embraced the idea and got a tax passed -- but it amounted to just 4.3 cents per gallon.
Now Verleger favors what he calls a "prospective gasoline tax," which would allow the country four years to get ready to do the right thing. Congress would enact a stiff tax of $2 per gallon, to take effect in January 2009, with further increases of another dollar in each of the following three years. To cushion the blow, the Treasury would borrow against the expected tax revenue to buy back the public's gas guzzlers (defined as vehicles getting fewer than 25 miles a gallon) at their 2004 value.
Verleger estimates that this program could reduce U.S. oil consumption by almost 2 million barrels per day in the program's first year and as much as 10 million barrels per day by 2020. At a stroke, that would reduce the power of the OPEC cartel and America's vulnerability to turmoil in the Middle East. As a bonus, it would also reduce emissions that contribute to global warming and increase employment in the auto industry as all those gas guzzlers are replaced.
There's one big problem with Verleger's idea. It's too sane. America likes roaring down Thunder Road, playing chicken with the oil cartel.
© 2004 The Washington Post Company