Friday, May 11, 2007

The Usual Suspects

"Major Strasser has been shot. Round up the usual suspects."
- Captain Louis Renault (Claude Rains), "Casablanca"

Gasoline prices have been rising steadily since the middle of February, and so, with perfect predictability, the Congress is again discussing measures to deter "gouging" and tax the "windfall profits" of the oil industry. Rather than reciting my well-worn arguments about how counter-productive that would be, in addressing the serious, long-term energy problems we face, I would like to consider whether they--or we--should really wish the price of gasoline were much lower. Many of the same Senators and Representatives desiring to punish oil companies for periodically charging consumers so much for gasoline support legislation that would raise US gasoline prices permanently, as part of an overdue effort to bring our greenhouse gas emissions to heel.

It's understandable that consumers are complaining, since for many years we've enjoyed lower fuel prices than most of the developed world, because the US doesn't tax gasoline as heavily as other countries do. But even though gas prices are now setting records in nominal-dollar terms and again approaching the inflation-adjusted high water mark of the early 1980s, they are still relatively affordable in terms of the purchasing power of all but the poorest Americans. That's a pretty abstract concept, however, when you've just paid $50 to fill up your tank. I can only imagine the quantity of mail that Senators and Representatives have been receiving on this subject.

When the new Congress arrived in January, they brought with them a heightened focus on two important issues with a direct bearing on this subject: climate change and energy security. If they are serious about addressing these problems, then the country can't go on consuming increasing quantities of fossil fuels, year after year, creating serious consequences for the environment, our balance of trade and domestic security. And while a great deal of attention is being directed to increasing fuel economy standards and promoting alternative fuels, I would venture to say that most of our leaders also understand the basic relationship between price and demand. Simply put, we cannot get a handle on greenhouse gas emissions and oil imports without halting the year-on-year growth of demand for petroleum products. And that can't happen if those products revert to being as cheap as they have been. For the first time in many years, gasoline demand in California stopped growing last year, suggesting that the target gasoline price level for achieving zero growth nationally lies somewhere between $3.00 and $3.50/gallon.

At the same time, many of those decrying today's high gas prices also support legislation to cap US greenhouse gas emissions and institute a national trading system that would put a monetary value on these emissions for the first time. Imposing this measure on the petroleum industry, whether at the producer or consumer level, would inevitably increase gasoline prices. If prices for tradable emissions credits in the European markets where this has been instituted are any indication, the increase could range from $0.10-0.30/gallon.

Rather than pursuing populist assaults on Big Oil--some of the large profits of which are the result of the constraints imposed on the domestic refining industry for the last 30 years--the Congress and the President should join in telling the public that the days of cheap gasoline are over. We need to hear how serious the problems of climate change and energy security are, and that we are responsible for the energy we consume and the vehicles we choose. That would be much harder than issuing subpoenas to the oil company CEOs and threatening them with huge fines and jail time, but it is a necessary precondition of building a national consensus on energy and the environment. If we expect our leaders to level with us about the progress of the war, should we ask any less of them on energy?

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