Wednesday, April 30, 2008

On Lowering Gas Prices and Other Legislative Ways of Setting Pi Equal to 3.0

Obama thinks that McCain and Clinton are engaging in simple pandering on the gas tax holiday. I completely agree. But the pandering doesn't stop there. Obama recently said of the evil oil companies:
"They have been in fat city for a long time," Obama said of Exxon and other oil and gas companies. "They are not necessarily putting that money into refinery capacity, which could potentially relieve some of the bottlenecks in our gasoline supply. And so that is something we have to go after. I think we can go after the windfall profits of some of these companies.”
"Not necessarily putting that money into refinery capacity"? My but that's slipperily worded. And incidentally, just because I'm a big fan of public cluelessness, he also said:
"We should also be investing in new technologies,” he said, “so we can replace the internal combustible engine, which has served us well, but it’s time for us to move on, because we want to get rid of fossil fuels.”
Apparently, in his zeal for a little ethanol pandering of his own, he's forgotten that ethanol also is used in the "internal combustible engine."


But I digress.

Since we have all three candidates claiming they're going to "do something about the high price of gas," it behooves us to look at some options:
  • Gas tax moratorium. Well, sure, this will reduce prices temporarily. However, gasoline consumption is highly elastic. If you reduce its price, demand perks right up. That means that the price will rise to cover the tax reduction. All you're doing is temporarily increasing consumption until we're right back where we started.

  • Price controls. I suppose you could limit the price of gas by fiat. But two things will happen. First, you'll increase consumption. Then, instead of the price rising, there will be shortages. Personally, I'd rather limit supply the good ol' fashioned (via the market). But if any of the candidates would like to blow their feet off, I heartily recommend this as a way to ensure that they a) don't get elected or b) if they do, that they only serve one term.

  • Windfall profits tax. Tax whom? For what purpose? To the benefit of whom? This is something that Obama has come out for. As far as I can tell, he's been pretty vague about what the proceeds will be used for. Will he rebate the proceeds to gas purchasers? How? Or will he simply plow the proceeds into the general fund on the assumption that he and Congress know better how to spend the oil companies' money. Windfall profits taxes have always been a kind of litmus test for me. Candidates that think they're OK are either pandering or have plans for social engineering that I find a trifle scary.

  • Increasing domestic exploration. Well, the good news is that this could actually be done. The bad news is that it won't do anything to the price of oil for many years and then it will only have a modest impact. We could increase the total US production by 10-25%, but since the US is currently only about 6% of world production, this isn't going to dent the world market very much.

  • Build more refineries. This of course is the right short-term answer if you really care about gas prices. But you'll have to overcome the NIMBY effect to make any progress. If I see a candidate actually stand up to some local interest group on this issue, he'll accumulate points with me. But that won't happen until we've elected one of these jokers...

  • Alternative energy. This of course is the right long-term answer. Unfortunately, the thing that will stimulate the deployment of alternative energy systems is... high gas prices! A say bring 'em on but I'm a limosine liberal on this issue. It won't hurt me very much, but it'll hurt a lot of others.
Bottom line: There are no quick fixes. Furthermore, politically unpalatable though it may be, the proper policy decision is to keep gasoline prices high. It's a burden to the economy but the energy situation is a national security priority. On this, I think I'm pretty much in agreement with everything Tom Friedman says in this.

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