By Paul Sabin — Special To The Bee
Published 3:15 am PDT Sunday, April 4, 2004

As gasoline prices reach record highs around the country, President George Bush and Sen. John Kerry are competing to cast blame and tout their price-busting strategies.

Bush is urging passage of the administration’s proposed national energy bill, stalled in Congress, including the opening of the Alaskan National Wildlife Refuge to oil drilling. Kerry criticized the president in San Diego on Tuesday for allowing gasoline prices to increase by 11.5 percent during the past three years. Kerry says Bush should divert oil from the Strategic Petroleum Reserve to the consumer market and persuade OPEC leaders to increase production.

Meanwhile, Democratic politicians – California Sen. Barbara Boxer, Nevada Sen. Harry Reid and Arizona Gov. Janet Napolitano – have called for investigations of price-gouging and market manipulation by oil companies in their home states.

These political proposals assume that high gasoline prices are a threat that needs to be stamped out. But paying more for gasoline isn’t necessarily bad if you’re not worried about serving powerful economic interests or appeasing angry constituents.

To be sure, the short-term rise in energy prices badly hurts consumers and producers. The price hikes, which have peaked nationally in California at more than $2.25 per gallon, hit the poor disproportionately, cutting into limited disposable income.

Worse, painful short-term price hikes serve no greater purpose. Drivers, homeowners and manufacturers take a hit to their wallets, yet the reasonable hope of lower future prices gives them no reason to change their ways. Owners of a Hummer H2 are unlikely to take their cars back to the dealer because gasoline prices briefly jump above $2 per gallon (though they may regret the $45,000 they paid). Conversely, owners of a fuel-efficient hybrid Toyota Prius or solar-powered home may reap a short-term bonus. But with oil prices generally low, Prius owners still cannot reliably recoup their extra expenses. A spike in fuel costs, followed by a return to previously low prices, just dampens economic activity and makes most people angry, without changing their behavior.

The energy legislation under consideration in Congress won’t do anything about these short-term ups and downs. Oil drilled in the Alaskan National Wildlife Refuge would not be available for seven years, and new coastal oil and gas discoveries encouraged by the national energy legislation have a similar time horizon. Instead, the proposed energy bill resembles President Bush’s tax cuts, which addressed a short-term, cyclical economic recession with long-term, budget-busting tax breaks.

The argument for cheap oil is that oil is such a key factor in world economic activity that keeping its cost down is crucial to stimulating national economic growth.

Cheap oil certainly has greased the wheels of our economy in the 145 years since Edwin Drake sunk the first well in western Pennsylvania. Inexpensive oil gave us kerosene light, fueled the automobile and air travel booms and provided feedstock for plastics and pesticides. All that spurred rapid economic growth and helped make the United States the world’s leading economic power.

Politicians helped make petroleum cheap. Federal energy policies are legacies of pro-development mineral laws that date back to 1897, when Congress declared that an oil prospector who discovered petroleum on federal lands could acquire the land virtually free. In the 1920s, the federal and state governments began subsidizing oil development with generous tax breaks, like the oil depletion allowance. After World War II, taxpayers in the highest tax bracket could deduct 90 percent of the expense of drilling an oil well. Foreign tax credits similarly put the U.S. Treasury behind the oil industry. Meanwhile, loose environmental regulations got oil companies off the hook of paying for environmental protection, like the double-hulled tankers that would have prevented the Exxon Valdez spill.

Yet it is difficult to find in the record any national discussion of whether cheap energy was the best way to promote economic development. Instead, United States energy policies have reflected the influence of energy companies maneuvering for favorable tax breaks or access to public lands.

If these kinds of laws ever made sense, they do not anymore. Cheap oil also has brought upon us the daunting challenge of global climate change and a risky dependency on the Persian Gulf. Among the likely changes expected in North America as a result of the carbon dioxide emissions that cause climate change are rising sea levels, intensifying storms and the decline of cultural and ecological systems like the northeastern hardwood forests. Analysts for the Pentagon’s Office of Net Assessments have warned that an abrupt change in atmospheric conditions caused by climate change could spark a wave of destabilizing conflicts over resources around the world.

The past 15 years also have demonstrated how profoundly our dependence on petroleum affects United States national security and how costly it is to the nation. The nation’s last two major wars were petroleum wars, in the sense that they most likely would not have occurred absent the overarching importance of Persian Gulf oil to the American economy. Many other factors also have been in play, but Persian Gulf oil, above all, has made Iraq significant to the United States. The first Persian Gulf war cost more than $60 billion, while the more recent invasion of Iraq has cost more than $100 billion, with more than 550 American deaths and 3,000 casualties.

Given the rising toll that cheap oil is taking on our environment and our national security interests, shouldn’t proponents of federal legislation to boost oil production have to make a case for keeping oil prices low? Advocates for propping up our current cheap-energy system should explain why we should spend tax dollars to contain energy prices. After all, there are many ways to stimulate economic growth. Why not lower payroll taxes, for instance, and help put people back to work without wreaking environmental havoc?

Rather than drive energy prices down, the United States instead needs a steady rise in fuel prices that will offer consistent incentives to increase energy efficiency with minimal economic disruption. Energy prices that rise predictably will stimulate technological development and make the United States a global leader in energy-efficient design and production. Rising prices would gradually decrease the energy intensive nature of our economy, liberating us from our dependence on overseas oil and reducing our contribution to global carbon emissions.

In Japan today, where energy prices are higher, the rapid adoption of energy-efficient technologies means that the country consumes 25 to 30 percent less energy per unit of output than the United States in the manufacturing and transportation sectors. Not coincidentally, Toyota and Honda dominate the market for hybrid vehicles in the United States and three of the top five solar power producers worldwide are Japanese.

Energy legislation that facilitates a steady long-term rise in fuel prices would be a responsible climate policy, economic development strategy and national security initiative. Cheap oil is no longer worth the price. Managed carefully over time, rising fuel prices are a better bargain.


Paul Sabin teaches American history at Yale University and is executive director of the Environmental Leadership Program. His book, “Crude Politics: The California Oil Market, 1900-1940,” will be published by the University of California Press in November 2004.

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