TOSS A BARREL of $135 oil into the economy, and the ripples will swamp some of the boats trying to stay afloat in the current sea of economic troubles. And planes. Airlines are grounding their least fuel-efficient planes in an attempt to cut costs. So fewer budget-priced seats will be available to prospective vacationers. Businessmen, too, are beginning to respond to the rising cost of company meetings by discovering the virtues of teleconferencing. Of course, home-bound consumers and desk-bound businessmen could drive, but with gasoline prices being what they are, that, too, is an expensive undertaking.
All of which adds to the pressure on politicians to do something. Not for them Ronald Reagan’s famous plea to his officials, “Don’t just do something, stand there.” Some sensible new policies are badly needed, but that is not in the cards, since the inclination of politicians is to do precisely the opposite of what needs doing.
In their never-ending hunt for the quick fix, our politicians want to ease the pain at the pump by lowering gasoline taxes. Never mind that prices would soon rise so that the net effect would be to lower the tax receipts of our treasury, and increase those of the House of Saud, Hugo Ch vez, Vladimir Putin, and others not kindly disposed to Western democracies. Even if prices did fall, the result would be to encourage greater use of gasoline, and to discourage the development of alternatives to the use of oil-based products.
The hard fact is that are no quick fixes, none that would have significant effect in, say, the next ten years. Review the list:
* Coal is available in abundance in friendly nations, but coal is the b te noire of environmental groups, more precisely, one of their many b tes noires. Over 100 of the 151 coal-fired plants in the planning stages in America last year have either been denied permits, quietly abandoned, or are being contested in the courts by environmental groups.
* Ethanol is in disrepute because the subsidies offered have caused a switch from food to fuel production, driving up food prices with disastrous consequences for poorer nations. The costs of ethanol production, in the opinion of American Enterprise Institute economist Robert Hahn, “are likely to exceed benefits by about three billion dollars annually in 2012 if current policies continue … .”
* The electric vehicle remains more a hope than a reality, as batteries that are quick-charging and long-lasting are simply too expensive to compete with gasoline-driven cars, and lower-cost batteries take a long time to recharge and don’t get you very far down the road.
* Significant supplies of newly discovered oil might put downward pressure on prices, but the producing countries won’t allow exploration and development, congress has closed off development in Alaska and offshore US, and new fields in Brazil and elsewhere will take years to develop.
* The costs of solar and wind generation are dropping, and the number of such projects is increasing. Solar enthusiasts are encouraged by the success of last week’s 1.8 billion public offering by EDP Renov veis, the solar arm of Energias de Portugal. But solar and wind remain heavily dependent on on-again, off-again subsidy programs and in any event are not significant substitutes for oil.
There’s more, but you get the idea–the cavalry is not just over the hill; it has yet to leave its base. Prices might come down a bit from time-to-time, or even by a lot now and then, but so long as China, India, and other countries continue growing, enriching their bicycle-riding, rickshaw-pulling masses, and subsidizing their gasoline consumption, pressures on supply will remain severe. Oil prices will remain higher than they were before the current run-up, barring an unlikely massive increase in the value of the dollar. At some point, perhaps a decade hence, alternatives to oil will make their appearance on a scale that might matter–unless the oil producing nations respond to the threat to their dominance of energy markets by lowering prices.
So in the long-term future, Americans will become more like Europeans–a description for which I am indebted to Professor William Hogan of Harvard University’s John F. Kennedy School of Government, a long-time observer of energy markets. We will continue the shift that has left dealers with lots crammed with unsold 4x4s, and unable to meet the demand for more fuel-efficient vehicles. We will set thermostats higher in summer and lower in winter. Insulation levels will increase, and lighting levels decrease. All because we have refused to tax gasoline so as to get the money into the US treasury rather than let producing nations snatch it for themselves.
In short, economics works, if consumers are left free to adjust to higher prices in ways they find most agreeable and efficient. But politicians prefer “solutions” that not unsurprisingly confer more power on them and less on markets. Republicans, backed with the threat of a presidential veto, managed to stall the drive to introduce a cap-and-trade system for reducing carbon emissions, but since both Barack Obama and John McCain favor it, cap-and-trade is in our future. Carbon taxes would be more efficient, and allow individuals and businesses to decide how to adjust their energy use to cut emissions. But cap-and-trade lets politicians decide which lobbyists get permits for their clients, and which are so ungrateful that they do not. Best of all, politicians get to decide how to employ the trillions that will be paid for permits.
This undercover raid on energy consumers and plan to enhance government power is not the only energy policy that has the approval of both presidential candidates. Both promise “energy independence;” let’s hope they are bright enough to know they are being economical with the truth. Both want to keep the ban on drilling in Alaska; Obama wants to maintain the ban on drilling off-shore, and by leaving it to the governors of those states, McCain effectively favors the same ban. Both fear that the globe is warming. So it seems that we have a choice between two candidates who have drunk deeply of Al Gore’s global warming potion while zooming around the country in private jets and racing to meetings in the large SUVs favored by them and their entourages. No light carbon footprint for them.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
