Today’s Courier Herald Column:
It’s Friday again, so we’ve all made it through another week. And as usual, I’ll continue my Friday tradition of venturing away from Georgia politics. I spent two days this week in Detroit. It was 5 degrees and snowing, so please try not to be jealous.
The location did have me thinking a bit about our auto industry as I literally watched gas prices rise. Prior to the recent bankruptcies and bailouts, the US manufacturers produced their largest cars here, and generated much of their profits from large truck and SUV sales.
When gas prices spiked a few years ago, the quickly changing customer tastes for hybrids over trucks was one of the many straws that broke the camel’s back. Republicans responded with “drill here, drill now”, while Democrats offered us CAP and Trade. All talk, much of it loud, but no action.
Today, countries representing more than half of OPEC’s oil production are facing various levels of civil unrest. Yet the US continues to rely on imported oil for 70% of our total demand. About half of that is from our neighbors in Mexico and Canada, but the other half – roughly one third of oil we use on a daily basis – comes from the middle-east and Venezuela. As if the stability these country’s governments was not enough to spur some action toward energy independence, the fact that we transfer hundreds of billions of dollars in US wealth to regimes that wish us harm should.
It’s time we started to take this issue a bit more seriously, rather than screaming like petulant children every time gas prices spike, yet quickly turning our attention elsewhere when the prices abate a bit. To date, the most comprehensive energy policy has been forcing automakers to accept higher CAFE standards, which essentially mandate a minimum fuel economy for the entire fleet of vehicles sold by a manufacturer.
The problem with this strategy, however, is that it is ultimately the consumer who decides whether they will buy a 50 mpg Prius, or a 15 mpg Tundra. The market decides what the CAFE number for Toyota is based on how many buyers prefer Prius’s over Corollas, or Tacoma’s over Tundras. Consumers must understand and accept higher gas prices as a fact of life in order for them to make long term conservation decisions.
The demand side is not all that goes into the price of gasoline. Suppliers also influence market prices. But major oil companies operate on 50 year plans, and are generally slow to react to market conditions. Much of the reasoning for this is that prices rise and fall, and most can simply purchase oil from abroad cheaper than it can be produced domestically. Thus, the suppliers must have a strong pricing incentive to induce them to invest in producing domestic oil that is harder to extract and often harder to refine.
The solution to this problem, from a purely economic point of view, is an imported oil tax. It should be phased in, over a period of 5-10 years. If we exempted NAFTA countries from the tax, it would affect roughly 30% of the oil coming into our country. For the purposes of this discussion, let’s assume the tax is revenue neutral, meaning other taxes will be offset with tax cuts elsewhere. This would limit the negative income effect of the price increases in gasoline and transportation costs.
But it should be enough to send a signal to oil companies that they need to invest in domestic production for the long term, and for consumers to understand that prices will be going up, and to plan accordingly. Likewise, Democrats will have to recognize that ANWAR can be drilled successfully with a total area disturbed smaller than a major US airport. We must resume and expand offshore drilling, despite BP’s recent episode of gross neglect. And we must adopt an energy policy that uses technology and resources available today – nuclear and natural gas – to diminish our dependence on imported oil.
The time to fix the roof is a day when it isn’t raining. We’ve had a few dry years, but there are serious storm clouds on the horizon. We haven’t time to waste, because we’ve already wasted so much.