Gorging On SUVs
It’s the Saudi conspiracy or the environmentalist conspiracy or the big-oil conspiracy or the election-year conspiracy: All these explanations have been advanced for increases in gasoline prices. Nobody seems to be talking about the real cause of higher pump prices: supply and demand. Americans are increasing their use of gasoline more rapidly than refiners here and abroad can increase production. When demand for a commodity goes up faster than supply, the result is higher prices. What’s happening may only be the beginning of what will be a long, entirely free-market-driven upward trend in gasoline prices--unless reforms are enacted.
None of the conspiracy theories for gas prices hold up under scrutiny. The Organization of Petroleum Exporting Countries can’t be the fundamental cause, for it has increased output twice this year. Prices don’t seem driven by the advent of the new, very-low-polluting reformulated gasoline, since introduction of this fuel caused little or no retail effect in most regions. (The latest gasoline formula will extend to the entire country the positive smog-reduction trends of Southern California, where state and local rules already require very-low-pollutant formulas.) Most of the season’s hubbub about sudden gasoline-cost spikes arose in the Midwest, where pump prices for regular unleaded jumped above $2 a gallon in June, versus a $1.65 national average. But the Midwest was also the scene of a major petroleum-pipeline break. Petroleum has now been rerouted, and Midwestern gas prices are falling toward the national level. That national level, however, shows an underlying gradual upward trend.
In recent weeks, Republicans, including presidential candidate Gov. George W. Bush of Texas, have tried to fix the blame for rising gasoline costs on the Clinton administration, suggesting the chickens are coming home to roost for President Bill Clinton’s lack of an energy policy.
It’s true that energy policy has been a weakness of the Clinton years--but why? Congress blocked Clinton’s 1993 attempt to impose a BTU tax (which would have encouraged energy efficiency, and been in lieu of other antideficit measures subsequently adopted) and failed to go along with White House requests for tax credits to encourage alternative fuels. Most important, for five years now, Republicans in Congress have barred the president from raising federal fuel-economy standards for cars and trucks. Vehicle-mileage standards have not gone up in a decade.
What’s the result? The SUVs are coming home to roost. Increased consumption is what is causing increased gasoline prices.
Adjusting for short-term fluctuations through the last decade, average U.S. daily gasoline consumption has increased by 13%; in that same period, inflation-adjusted pump prices have risen about 10%. There’s no international mystery here: This is textbook supply and demand. Surplus refinery capacity has been absorbed in the process, with consumption rising almost 60% faster than production capacity since 1993.
Falling gas mileage is behind it all. U.S. automobile fuel economy peaked in 1988 and has been declining since; light-truck and SUV fuel economy peaked in 1987 and has been declining since. As American buying habits shifted toward such dreadnoughts as the Chevy Suburban and Dodge Durango--which should be marketed as the Chevy Bismarck and the Dodge Missouri, for those who know their battleship lore--rates of gasoline consumption have headed upward. Prices have followed, pretty much in sync.
Of course, Americans still enjoy the cheapest fuel of any industrial nation. Drivers in Japan and in France, Germany and other Western European nations pay an average of $4 a gallon--and therefore don’t buy SUVs. Long U.S. driving distances make affordable fuel a good thing for American society. But when we already pay less than half of what most drivers in Western nations pay, there’s something faintly detached about hearing Americans moan about how terribly expensive gasoline has become: as though cheap fuel were a right, not a privilege.
Moreover there’s something faintly pampered--if not selfish--about Rolex-wearing drivers pausing at the doors of $55,000 luxury SUVs to announce that they’re outraged by $40 fill-ups. Often, Americans want the freedom to make whatever free-market decisions they wish--such as to buy large and wasteful vehicles--but then want to be exempted when their decisions have free-market consequences they don’t like--such as higher gasoline prices caused by consumption curves.
Politicians have learned to indulge this inclination, telling voters whatever they’d like to hear. Bush declares in his campaign book “A Charge to Keep,” “I believe in the free market, in good times and bad--government should not try to control the price of a commodity.” But now that drivers are upset, Bush has blamed Clinton and Vice President Al Gore for, well, not trying to control the price of a commodity. Democratic candidate Gore, for his part, has tried to blame Bush for oil prices, suggesting that the governor’s oil-industry ties are somehow causing the rise. In reality, neither Bush nor Gore has anything to do with it. Americans, as a whole, are causing the price rise--by buying ever-larger vehicles that consume too much fuel.
This bodes ill for the next decade or so, since new oil discoveries are lagging behind the increasing rate of global demand. As global oil use grows at about 2% annually, the “reserves to production” ratio for most oil companies has fallen during the last decade from 18 to 12 years. Some analysts now project that the global oil-production peak will come in about 10 years. Once the peak is passed, petroleum will still be widely available for decades, but under a price equilibrium at which demand is far stronger than supply.
What can do done? Some oil executives and some in Congress assert that what’s most needed is for Clinton to lift the moratorium on oil exploration in Alaska’s Arctic National Wildlife Refuge, allowing a domestic oil production increase. The ANWR almost certainly contains big fields, and almost certainly its coastal range could be drilled without the ecological calamities predicted by environmental lobbies. (Other than the Exxon Valdez--a shipping error, not a production mistake--oil extraction from Prudhoe Bay has caused no significant environmental harm, and ANWR drilling would use technology that is 20 years more advanced.) Projections, though, suggest ANWR contains six months to three years of U.S. petroleum consumption: important, but not enough to alter the underlying supply-demand trend. Improved vehicle-gasoline mileage could soften demand faster than ANWR exploration could boost supply--and then we’d still have the ANWR petroleum in the ground, as a reserve against future international troubles.
If Congress really wanted to act against gasoline prices, it could restore the president’s authority to order higher gasoline mileage for cars, trucks and SUVs. But economists don’t like the federal program, called Corporate Average Fuel Economy (CAFE), which they view as cumbersome. A simpler, economically efficient remedy would be what dozens of economists have suggested and no prominent politician will touch: higher gas taxes.
Taxes “internalize” economic costs by making the full price of something part of the buyer’s decision. As such, in energy policy, most economists prefer price signals from taxes to complicated regulatory schemes such as CAFE. If we really want an energy policy, we should increase federal gasoline taxes in a revenue-neutral way--that is, cutting other taxes by an equivalent degree. The offsetting tax cuts would be targeted to the poor and working class, on whom gasoline prices fall disproportionately.
As economists point out, whatever you tax you get less of. Today, the United States lightly taxes gasoline--federal, state and local levies now average about 55 cents per gallon of the pump cost, versus, say, $2.50 per gallon in Germany. The result is that we get more consumption.
Meanwhile, the U.S. highly taxes labor and capital, discouraging the very things from which everyone benefits. If the United States were to increase gasoline taxes while cutting taxes on labor and capital, the market would sort the rest out on its own. Demand for hefty “suburban assault vehicles” would fall of its own accord. Or perhaps, of its own Accord.
It’s time the United States had a serious policy to encourage alternative energy, including “biofuels” grown on farms (based on genetically engineered grasses and dwarf trees, not corn) and to encourage advanced propulsion ideas, such as cars that run on hydrogen “fuel cells.” Critics often view alternative energy as wimpy or somehow a retreat to the past: Actually, it represents a budding 21st-century economic growth sector, where America’s combination of technological prowess and agriculture bounty might lead the world.
Think about this: Throughout 2000, OPEC has been slowly increasing output, in an attempt to hold the world oil price to just under $30 per barrel. Now, why wouldn’t OPEC want higher barrel prices, since its members benefit? Analysts think a sustained $30-plus world oil price is what will make alternative-energy forms cost-effective--and OPEC doesn’t want U.S. technology and capital to turn their attention to putting OPEC out of business. Which a long-term policy of alternative-fuels development and revenue-neutral gasoline taxes could do.
