|By Paul Sabin| June 27, 2000
In response to headlines about rising gasoline prices, presidential candidates George W. Bush and Al Gore are competing to promise relief and criticize foreign oil suppliers. Congressional leaders and Midwest governors are also on the attack, denouncing environmental regulations, suspending state gas taxes, and calling for opening the Arctic National Wildlife Refuge and the Strategic Petroleum Reserve.
Their rhetoric may be good politics, but it makes for lousy policy. Higher gas prices are a short-term headache, but they also offer a window of opportunity to walk the walk of environmental and economic progress.
More expensive oil will rapidly push our economy to natural gas, fuel cells, solar units, and improved efficiency – the energy sources of the future.
That, in turn, will help us cut air pollution and energy use, spur meaningful action on climate change, and reduce our dependence on foreign oil.
For a generation, skeptics of alternative fuels have cited low oil prices as a reason for the slow adoption of alternative energy. Now, as politicians compete to stoke public outrage, we are seeing the latest evidence of the real force at work behind low pump prices: political intervention. Here are some of our government’s favorite ways to keep us hooked on cheap oil throughout the last century:
Former President Lyndon Johnson had an iron rule of politics – his allies had to protect the oil depletion allowance. For 50 years, the depletion allowance allowed oil companies to deduct more than a quarter of their gross income before taxes. The companies could also deduct immediately all expenses for drilling new wells. Together, these tax policies massively subsidized the rapid development of United States oil reserves – and drove down the price of oil.
Public land policy
Oil developers have long struggled to open ecologically vulnerable public lands for oil development. From offshore Santa Barbara to northern Alaska, each new political victory boosts supply, further reducing oil prices. To make matters worse, the US government (and many other governments worldwide) gave oil-development rights away at fire-sale prices, charging meager royalties on rich proven oil fields.
Oil and automobile companies and their allies fight each new demand for improved efficiency or environmental quality. In the case of the Exxon Valdez oil spill, for example, powerful political opposition to double-hulled tankers neatly severed social and environmental costs from the price of gasoline at the pump.
Public policy has not just shaped supply; it also created demand. Since the early 20th century, local, state, and federal governments spent hundreds of billions of dollars building a vast infrastructure for oil consumption. Highways and airports are a taxpayer-financed juggernaut for centering the economy around oil consumption. With gasoline and airport taxes earmarked for further development, rising use automatically spurs new construction, tightening oil’s hold.
Though we don’t feel the cost at the pump, billions of our tax dollars fuel diplomatic and military efforts to keep oil flowing from the Persian Gulf.
We don’t exactly spend similar resources to protect access to solar power or fuel cells.
If we are serious about a transition to new fuels, a more stable climate, and less dependence on foreign oil suppliers, higher oil prices are the most direct solution. Today, fuel cell, solar, wind, and other energy companies can compete with the not-government-sponsored price of petroleum. With the right push, mass production and improved technology will make alternative fuel even cheaper.
Blocking the way are a century of subsidies to the oil economy that have artificially lowered prices, distorted the energy market, and kept us addicted to oil. Politicians should quit demanding greater OPEC production, threatening inquiries into industrial collusion, and suspending gasoline taxes. Instead, they should allow US energy markets to find a new equilibrium.
Paul Sabin is executive director of the Environmental Leadership Program and a Newcomen Fellow at Harvard Business School.
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