Friday, April 28, 2006

Reviewing The Laundry List

Today's New York Times describes a long list of proposals for addressing high gasoline prices. I've already devoted two postings to this issue this week, but I thought it would be worth quickly going through the list and offering my thoughts on each idea, without regard to which party has suggested it:
  1. $100 tax rebate - Good idea. Higher gas prices are a drag on the economy, and a little fiscal stimulus is just the thing to keep the consumer sector perking along, especially with interest rates rising. This works out to about $0.20/gallon for the average driver in the average car (not SUV.)
  2. Surtax on oil company profits - Bad idea. Although much of their activity has shifted overseas, due to more attractive (i.e. larger in scale) opportunities, taxing oil company profits at a higher rate than they already are, that is to say at the rate all corporations are taxed, will only deter them from investing in the US, where we need it most.
  3. Higher mileage standards for cars - Good idea, very slow impact.
  4. Curbing gouging - Populism at its worst. The alternative to the smooth functioning of supply and demand matched up by prices is gas lines. We don't want to go there again. Some of you are too young to remember what this was like, but I can assure you it was no fun. We are all better off spending a few more bucks for gas than losing hours of our time waiting in a gas queue, or worse yet, driving for miles to find a station that still has gas.
  5. Suspension of federal fuel taxes - Ineffective and wasteful. As long as supply is tight, prices will rise to take up the slack created by the tax holiday, and consumers will be no better off. If retailers are forced to pass it along, drivers will not get the price signal, will drive more, and we will end up with sporadic service station runouts. Meanwhile, the Treasury stands to lose something like $4 billion in revenues.
  6. Ceiling on royalty relief - Good in the short run, less so in the long run. Clearly, when prices are over $55/barrel, oil companies do not need relief from royalties they owe for producing oil from leases on government-owned land and in offshore waters. But changing the rules after the fact adds uncertainty to an already very uncertain prospect: drilling for oil that will only start producing 4-7 years after a project begins. Remember that when the offshore platforms that are coming on stream this year were started, oil was under $20/barrel. Royalty relief was an important factor in inducing companies to go ahead with those projects.
  7. Opening up the Arctic Wildlife Refuge for drilling - Good idea. I've covered this at length previously, and I continue to believe that Democrats and environmentalists are missing a bet in not trading this for a big concession elsewhere, such as a greenhouse gas cap or dramatically-higher fuel economy standards. Their continued opposition is only sensible if they think it can forestall drilling there forever. I don't think that's a realistic view. If ANWR's oil is going to do any good for the country, it needs to get going--there's a long time lag before it could start delivering--but it needs to be done as part of a comprehensive energy policy that also reduces demand and stimulates alternatives.
  8. Repeal of LIFO accounting - Uncertain effect. I opposed this when it was temporary and targeted only at oil companies. However, a permanent ban on LIFO for all companies might not be bad. It would create a one-time hit to corporate profits, but that shouldn't affect the stock market, because analysts would understand it was once only and across all companies. LIFO has created some strange behavior, and eliminating it might help align accounting practices with the real world of just-in-time, real-time inventory management.

The basic problem with all of this is that it took us decades to get into this pickle, and there are no simple answers that are resolvable in a single Congressional or even Presidential term. Gasoline prices are high because of the complex interaction of geopolitical issues, including war, local unrest in producing countries, and OPEC policies on production and access to reserves; environmental policies, including the reformulation of gasoline to reduce air pollution and widespread local variations of the same, along with restrictions on new refinery construction; and a glaring inconsistency in our fuel economy standards that allowed heavy, inefficient SUVs to displace roughly a quarter of the cars on the road. No Act of Congress or Presidential Order can alter even a portion of this overnight, nor should we as voters give our elected leaders the impression that we expect them to be able to do so. Meanwhile, only changes in our own behavior will matter.

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