By Peter Z. Grossman
08-06-04
The price of gas at the pump was $ 2.119 the other day. And when prices go that high, we can be sure of two things: First, American consumers will be outraged; and second, lots of people will be proposing solutions.
Indeed we have the usual calls for American "energy independence"
through increased government spending on (take your pick): drilling, alternative
energy development, conservation and either filling or emptying the Strategic
Petroleum Reserve. Some analysts are claiming these price hikes are a sure sign
we're running out of oil, and even some sensible economists are making arguments
for high taxes on gasoline to curb consumption. Unfortunately, most of these
solutions would create more problems than they would solve.
Most are really just forms of political pandering to make irritated American consumers think government is doing something to help. But the market is already doing something, and that something is likely to be more effective than any government effort.
In fact, energy markets have been giving us a clear message. Demand is rising
more rapidly than supply because economic growth, especially in countries like
China and India, is rapid. Meanwhile, refiners and others dependent on supply
are stockpiling oil out of fear that there will be disruptions in production in
the Middle East and elsewhere. If the world situation calms, the price of oil
will fall; analysts in fact expect gas prices to drop by about 10 cents per
gallon this summer.
Still, the political appeal of government action remains. The call for energy independence is a special favourite that always gets applause at political rallies. But the whole idea of energy independence is really nonsense. All oil is sold at a world market price; Alaska crude is essentially the same price as Saudi crude. That won't change even if we import much less oil. If the world price is rising, prices at the pump will rise. Period.
Even if we raise gas taxes by a few dollars a gallon and spendbillions on more
drilling, conservation and alternative energy resources, we'll be neither
independent from imports nor from world price volatility.
True, we might buy smaller cars and so feel less of an impact individually, but then American consumers are doing that already. Sales of fuel-efficient cars, especially gas-electric hybrids, are soaring while gas-guzzling SUVs are sitting in new car lots with few buyers in sight. This is exactly how economics would predict consumers would behave.
Even if prices fall from their current highs, as they probably will, there is
likely to be increased demand for greater fuel efficiency. Recent price
increases should have convinced consumers that they don't have a constitutional
entitlement to low gas prices and maybe it makes sense to trade in the Ford
Excursion or Chevy Suburban for a hybrid Ford Escape. Those who continue to buy
guzzlers, well, they'll just have to pay and the rest of us shouldn't have
higher taxes to protect them from their own mistakes.
Still, some serious scholars are advocating a gas tax of 50 cents or more per gallon to make sure that we practice more conservation. Besides the fact that such a tax is a non-starter politically -- the Bush campaign is already attacking Kerry for having considered such a tax 15 years ago -- it just doesn't seem necessary. It's clear that when prices rise, people respond.
As for alternative fuels, government has spent money on them before, but
national programs have never made them cost effective. We will have alternatives
when they can compete with fossil fuels. If in fact we're running out of oil,
then alternatives will reach the market sooner rather than later and people will
buy them.
However, it seems likely to be later rather than sooner. Another entirely predictable consequence of high oil prices is that there is more drilling and exploration in the US and abroad. The market is encouraging increased production; we apparently don't need the wasteful subsidies and tax breaks of the Bush energy program to get more oil.
Of course, the doomsayers claim increased drilling is not going to get us
anywhere. Well, "experts" have been making those predictions for more
than 100 years and have always been proved wrong. But if they are right, then
we'll see it in market prices that climb ever higher, and consumers will demand
greater efficiency, conservation and alternative fuels, which the market will
supply. We don't need government solutions; we have the market to provide the
signals we really need.
Grossman holds the Efroymson Chair in economics at Butler University. Contact
him at pgrossma@butler.edu.
Source: IndyStar.com