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On Energy: Same-Old, Same-Old

That doesn't mean, however, that a bit of additional supply can't have a beneficial impact on prices. In energy, as with all commodity markets, prices are set at the margin -- based on the last transaction -- and short-run demand doesn't change much in response to price fluctuations. In such markets, even small changes in supply can have a big impact on price.

· Raising taxes on oil companies will reduce supply and raise prices.

This is true, in theory, holding all other factors constant. But in real life, all other factors are not constant

Take Exxon Mobil as an example. A doubling of oil prices over the past year had the effect of increasing its U.S. upstream earnings by 38 percent in the first quarter of 2008. If the government had captured just half of that increase through a windfall profits tax, its after-tax profits would still have risen by 19 percent. That's surely enough to stimulate investment, increase supply and drive prices lower than they were the year before. And the government would have collected an extra $800 million a year from Exxon Mobil to use for conservation or other energy-related incentives.

· Drilling offshore or in wilderness areas would be a disaster for the environment.

The environmentalists' hysteria on these issues has always been way out of proportion to the actual risks involved, suggesting that it may have more to do with symbolism and fundraising. Missing from the environmentalists' logic is any recognition of the tradeoffs involved, not only between the environment and the economy but among environmental goals.

Alaska and the continental shelf, for example, hold the potential to produce huge amounts of natural gas, the cleanest fuel now available for large industrial users and electric utilities. By providing additional crude oil to the U.S. market through pipelines, we could reduce the volume of oil brought in on cargo ships, which have much greater risk of disastrous spills.

Perhaps the more interesting question, however, is what could be gained in a political horse trade involving these drilling issues. And if the answer is industry support for a plan to reduce carbon emissions to stem global warming, then accepting a bit of well-regulated drilling in Alaska or off the Florida coast could turn out to be very good for the environment.

Here's a guess: The presidential candidate who wins in November won't be the one who's best at activating his base or pandering to the views and concerns of the voters. It will be the one who shows he can lead by speaking the truth, setting a limited number of priorities and demonstrating the knack for making the compromises necessary to accomplish them. And by that criteria, the race is still very much up for grabs.

Steven Pearlstein can be reached

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