WASHINGTON– Question: what do American law makers do when people are anxious about high gasoline prices? Answer: Theatre. During a May 12 Senate Finance Committee hearing Democratic Senator Charles Schumer of New York gave a good rendition of the irate law-maker browbeating ConocoPhillips CEO James Mulva. Schumer found it deeply offensive that ConocoPhillips dared calling ”un-American” any attempt to repeal tax benefits that oil companies enjoy –along with everybody else, mind you. So, Schumer did his act of the righteous law-maker, asked for apologies and got media attention, but not much else. Unfortunately, grandstanding aside, none of this nonsense will have any impact on high gasoline prices, the worry of the day.
US oil companies do not set oil prices
Whatever Congress may want to do about taxing oil companies, the sad reality is that America still does not have an energy policy –and this is the real problem. For transportation fuel there is basically only oil based gasoline, (subsidized corn-based ethanol adds only a little bit). And 60% of the oil we consume has to be imported, because America is running out of reserves. And now, because of deep unrest in the Middle East and the loss of most Libyan exports on account of the ongoing uprising there, oil prices have gone up to around $ 100 a barrel. This translates into $ 4 a gallon for gasoline. The honest truth is that there is no fix for today’s prices. However, if we are smart, for the long term it would be a good idea to craft an energy policy that would reduce dependence on foreign oil.
Grandstanding instead of crafting policies
But no, Washington politicians, thinking that they have to respond to the general misconception that it is possible to enact policies that will immediately reduce oil prices –a total fantasy– launch silly and totally irrelevant proposals, while doing little or nothing for the long term. And so they engage in what they do best: posturing and grandstanding, trying to show that it is all big oil’s fault. And so, to make this point and to show Joe Public that ”we are doing something“, the Senate Finance Committee dragged the evil oil men into a hearing for the purpose of lecturing them about their sinful sky-high profits and to tell them that the Senate intends to repeal tax relief for oil companies –relief that they should not really get, given all the outrageous money they are making.
OPEC and world demand determine prices, not US oil companies
Now, what is the correlation, let alone cause and effect connection, between tax subsidies, relief or whatever it is that the oil companies enjoy –along with everybody else– and high gasoline prices? You got it: zero. Gasoline prices depend on world-wide oil prices that, contrary to popular opinion, are not controlled by Exxon, Chevron and BP. No, they are determined in large part by Chinese, Indian, American and European consumers who have an unstoppable thirst for oil.
And they are also determined by the OPEC oil cartel, as OPEC controls a huge percentage of global supply and thus influences prices. So, it is strong demand and (manipulated) supply that now gets you $ 4 at the pump. (The opposite is true as well. When the world economy was reeling in 2008 and 2009 because of the financial crisis, oil prices were half what they are today. Demand fell drastically and so did oil prices).
Sure, it may be a nice gesture on the part of the oil companies benefiting so handsomely from extra high prices to give up their tax breaks. But this would be their own version of political posturing and grandstanding. This would be about public relations, not about gas prices. In any event they are not interested in any of this.
In the end, the Senate had its show, with the hope of getting headlines. If this is what they mean by being “law makers”, God Help Us.
House Republican have their own populism: “Drill Baby Drill”
But this populist character flaw is nicely spread around. The Republican controlled House of Representatives has its own populism on energy. Now the rage is about drilling more in the US, ”so that we can get our own oil“, thus fueling the surprisingly popular misconception that, if we would only stop regulating drilling, there would be thousands of gushers all over and our problems would be over. Not true, friends. In principle, more drilling is not a bad idea, but it has limited value. It is not the ”solution” to high gas prices.
Additional oil is good, but do not oversell it
Let’s be clear, any additional domestic oil is good. But, unless America would discover and start pumping very soon an additional few million barrels a day, whatever we do will have zero or minimal impact on prices. Again, it is about demand and supply. Increasing global supply by 20,000 barrels here and there, or even a few hundreds thousand barrels a day will not mean that much in term of total world supply and prices. And world prices determine what eventually you pay at the gas station here in the U.S.
The more we produce at home the less we buy abroad
That said, additional domestic supply would have benefits. And what are they? Very simple. Assuming constant demand, every additional barrel that we produce at home is a barrel that we do not buy abroad. This is money that stays in America, as opposed to being transferred to oil-producing nations. Besides, additional domestic energy investments mean more money spent to add to new business here at home and some more jobs generated in America. Oil is a big industry, it generates demand for all kinds of supplies and services. So, more domestic drilling helps the economy.
Again, let’s not oversell this. There is a broad balance of payments benefit if we get more oil at home; but it is no economic panacea, unless we start talking about millions of barrels. There will be more jobs created; but this will not cut unemployment by 50% or even 5%t. And this will not – repeat, it will not– lower gasoline prices, unless the new oil finds will be so significant that new American discoveries will actually move world prices. Chances of this happening in the near term: about zero.
So, taxing the bad guys won’t work. “Drill, Baby Drill” will also do nothing to lower prices.
What can we do to reduce chronic oil dependence?
So, what would work? Nothing much that America can do, especially in the near term, to make oil prices go down. But policy makers, along with industry and the public, can work together to minimize the impact of high oil and gasoline prices by reducing dependence on oil. For sure, this would take a while; but it is well within our possibilities.
Very simply, we need to consume less oil. And this can be done through a combination of: 1) conservation; 2) changes in public policy that would encourage mass transit solutions, as opposed to driving individual cars; 3) aggressive development of alternative fuels.
Conservation, all experts would agree, is the neglected and yet totally available low hanging fruit. Conservation means moving much faster to smaller, low consumption vehicles. It does not mean that we stop driving. It means that we ditch the SUVs and get on with compact cars. If the switch would be fast and substantial enough, this would translate into savings of one to two million barrels a day. And all those who drive a compact car will spend less money to fill it up.
Mass transit via “Bus Rapid Transit”
Then we could aggressively boost mass transit via “Bus Rapid Transit”, BRT. It is complicated but totally possible to achieve the same advantages of costly underground metro rail systems via much cheaper, modern integrated bus networks using dedicated lanes. The advantages are that millions of people would use a more fuel-efficient bus rather than their own vehicles to get around metropolitan areas. You leave the car at home, you do not burn fuel.
New fuels: electricity and natural gas
And then there are the alternative fuels. This is the year of electric vehicles: GM Volt, Nissan Leaf and others. May be this is the answer, even though their cost effectiveness is still in the future. Still, electric cars mercifully use no gasoline or very little, in the case of the dual engine Volt.
Finally, there is all this US natural gas now extremely cheap, due to the exploitation of vast shale gas reserves. Gas can be used as transportation fuel. It is used this way in many countries, relying on proven technologies. Now this switch requires major changes in industry and mind set. But the economic advantages are huge. US gas is abundant and it costs about 1/4 of gasoline. In one stroke we could boost domestic industry and save a lot of money by buying less oil.
For starters, it would make sense to use natural gas as fuel for 18 wheelers operated by large fleets that normally have their own centralized refueling stations. There is pending legislation in Congress that would help expedite heavy trucks conversion. Down the line, it should be possible to manufacture regular cars powered by natural gas.
We can do this
So, there you have it. Not much that we can do to control oil prices. But if we use much less oil, then the impact of high gasoline prices will be less painful. So, let’s get started. First it is conservation: choose high mileage cars. Second, use mass transit and drive less. Down the line, make your next vehicle an electric car or one that burns domestic, natural gas.
If we could get started on all of these policies, in a decade we may see the cumulative effects in terms of significant reduction in oil consumption and therefore oil imports. And all these changes would be economically beneficial. We would have more energy investments at home. We would send less money abroad. The average consumer would be less dependent on gasoline and thus less exposed to high prices.
Politicians still looking for feel good quick fixes
Of course, none of these initiatives are going to help politicians today. And, assuming high gasoline prices between now and the November 2012 elections, who knows which way angry voters might go. Unfortunately, law makers and the White House react to today’s pressures, and do not think much about the long term. And so America, the biggest oil consumer in the world, limps along with no energy policy. Is it really that preposterous to believe that we could do better?