How to reduce gas pains

Today Tanton and Dugan discuss environmental issues related to gasoline prices. Previously they debated whether there is an appropriate price for a gallon of gas and what roles government should have in regulating gas prices.

Find the balance
By Thomas Tanton

We should allow prices to reach their natural equilibrium between supply and demand. Artificial means of controlling prices, either upward or downward, harms consumers and distorts our use of fossil fuels and other energy forms. Any mechanism to control consumption through prices or supply “management” mechanisms is social engineering in disguise and will do more harm than good. We have seen the negatives of such programs throughout history, and there is no cause to replicate that.

Markets will naturally restrict our use of fossil fuels as the price goes up and there is nothing “we” should do other than allowing the market to function. One thing we can do is to recognize the global nature of petroleum markets, and work diplomatically to instill private ownership of subsurface resources in other countries. That will bring about greater entrepreneurial behavior in those countries now under the thumb of government “management.”

We are not running out of fossil fuels. As prices increase, supplies—either more petroleum or various alternatives—will be increased. Similarly, when prices drop (and they have and they will) consumption increases to keep things in balance. Balance is a good thing.

Keep in mind that “resources” are not resources without the entrepreneur and innovation. Technology advancements are the key to maintaining supplies commensurate with a growing and vibrant economy. Programs that aim to encourage technology development should focus on less expensive and less price-volatile approaches; unfortunately most government programs are focused on the highest price and more volatile technologies such as ethanol mandates under the 2005 Energy Policy Act, and Gov. Schwarzenegger’s Low Carbon Fuel Standard. We can do better, in the interests of the consumer and the overall economy.

Thomas Tanton is the vice president and senior fellow at the Institute for Energy Research, and an environmental fellow at the Pacific Research Institute.

Oil companies can’t go green
By Judy Dugan

Dear Tom,

I only wish that your efficient markets in oil and gasoline described real life. If it were so, you’d be right. In reality, the broken, uncompetitive market in gasoline, coupled with government neglect of energy policy, makes the market incapable of helping cure our oil addiction while keeping the economy from petro-collapse.

First, a few things from yesterday. We agree on more than you think. I too am all in favor of temperature-adjusted nozzles at gas pumps to end “hot fuel” ripoffs. It’s the industry that’s blocking this, which is why government has to act.

And don’t worry about the loss of your mid-grade gasoline. Any station can install a blending nozzle to accurately mix premium and regular, and voila. It’s only the oil company demand that dealers keep a big tank full of factory-made mid-grade to which I object.

I don’t agree that oil companies are spending “tremendous amounts” on alternatives. The figures that you cite include exploration expenses, liquefied natural gas projects, filthy coal liquification plants, regulatory cleanups -- and tens of millions on PR boasts about corporate greenness. Real renewables get pocket change, like ExxonMobil’s $10 million a year for a questionable research project at Stanford University (compared to $39 billion in 2006 profit).

As to the modesty of oil profits, last quarter’s industrywide net profit margin -- 10.6% -- was near double the 6% average of the whole industrial goods sector, according to AT&T/Yahoo Finance. If you look at the more telling “return on equity” figure, the oil industry was above 27% ROE. For comparison, the highly competitive auto industry, including flourishing Japanese makers, had an 8.2% ROE. That’s because people have competitive choices when buying cars.

Now, back to whether gasoline pricing is the right mechanism for reducing fossil fuel use. No, not in the markets we face today. (See this great GAO chart on oil mergers to understand why competition vanished.)

All of the spike in prices is going to oil company coffers, to companies that fear their own inevitable decline but do nothing to create real markets in clean fuels. In the meantime, middle- and working-class consumers must reach for their credit cards to buy a $70 fill-up. We get no public transit development from Exxon’s $39 billion world-record profit, and no alternatives to gasoline.

Public policy has to step in when markets fail. It’s not a bad idea to reap some portion of oil companies’ current profits for renewable fuels development, particularly non-corn ethanol, as some of the bills in Congress now would do. Regulating supply is even simpler.

We regulate water and power utilities. The lights stay on, utilities have become leaders in conservation and renewable alternatives, and prices stay within reach.

Exxon, Chevron, Conoco, BP and Shell will, left to their own no-competition plan, keep jacking up refinery profits and emptying motorists’ wallets -- while resisting development of true markets for renewable, clean alternatives.

BP’s smugly “green” gas station in Los Angeles sells nothing but gasoline, three grades. Chevron’s trumpeted investment in biodiesel won’t go to Chevron gas stations. There is no better proof of true intentions, and of an industry’s failure to see its own future.

Judy Dugan is research director of and The Foundation for Taxpayer and Consumer Rights (