Tuesday, April 22, 2008

It's Economics, Stupid

On April 15, Senator John McCain called for a suspension of the federal gas tax this summer. Senator Hillary Clinton followed recently on Larry King by suggesting that the idea should be studied. In her message, Clinton said that we need to investigate the price highs that Americans have been seeing at the pump.

This comes in the face of record oil prices. Today's close had crude oil at $119.37 on the NYMEX. For a run down of recent factors, MSNBC has an excellent analysis. Still, I think that oil prices represent something more than a periodic disruptions in supply. Prices have been rising consistently for several years, a factor I attribute to global tensions--at least at the beginning. Now, however, with OPEC blaming the falling dollar on prices and claiming that there is no demand for additional oil (even when many of the chiefs of state in West are calling for it), I am less sure.

Right now, the United States makes up 5% of the world's population, but we use 25% of the world's oil. If everyone on the planet lived like the average American, we would need 5.33 Earths to support us all. Another way of saying that is to say that for every person who uses more than their share of the planet, someone else gets less share. At any rate, the main issue that we are facing right now is that most of the people of the world do want to live like the average American.

India and China comprise over a third of the world's population, and both are rapidly developing. As their countrymen and women start to drive more, as their distribution networks become more auto-intensive, and as their industry becomes more developed, their oil consumption will increase. China is already driving up the cost of construction projects here because of their insatiable demand for building products.

Today is Earth Day. Today we are meant to celebrate the planet that gives us life. Today we celebrate the only habitat of humankind. This year, with the green movement more popular than ever, we must consider the policy implications of a political folly like the one proposed by Senators Clinton and McCain.

All three of America's major presidential candidates have called for environmental protection. Climate scientists tell us that we must reduce greenhouse emissions immediately if we are to avert serious climate damage. Furthermore, reducing our dependence on fossil fuels will mean relying less on foreign sources for our energy needs.

A suspension of the gas tax is one of the worst policy decisions that can be made for America, for the simple reason of economics. Even for those people who are totally reliant on automobiles, a reduction in the gas tax will make you worse off.

Very few people argue that Earth's oil resources are infinite. The general consensus is that there is a finite amount of oil inside Earth's nougat center. While it is true that we don't know exactly how much oil is left on the planet, it will take millions of years of natural processes to even begin to replenish what we've used since oil was first successfully drilled at Titusville, Pennsylvania in 1859. Therefore, I think it's safe to gloss over the intricacies of geology and just say flat out, they're not making any more of the stuff.

This will come as a shock to many, but there will be a time at which point the last drop of extractable oil will be drawn from the Earth. Therefore, every time you fill up your gas tank, you are bringing us closer to that point. Every time you decide to drive somewhere you could have walked, ridden the bus, or stayed at home, you take oil from your children (or an older version of you). Similarly, every time someone else makes a decision not to drive, they extend that moment.

Mr. McCain's idea to give Americans at least one more tryst with cheap oil is a wasteful bit of public policy which will only make the choices harder for the citizens of Planet Earth on that day (and hasten it) when oil doesn't gush out of the Arabian desert. Inflation (some say stagflation) is hurting the American economy because we transport almost everything on the tide of oil. Even I can feel the pinch, and I don't drive. But every time I walk to the grocery store, I get sticker shock.

Let's ask ourselves which is more important: getting food to grocery stores or getting to the beach (by car) this summer? Fire engines with full gas tanks or 45 mile one-way commutes on Mr. Eisenhower's freeway network? Fuel for the military or free parking at the Sprawl-Mart?

If every person in the world cut their oil consumption by half immediately, we would double the amount of time before the end of oil. Perhaps a cut by half, especially immediately, is too much to ask, but the converse is also true. If every person in the world doubled his or her consumption of oil overnight, we would halve the time to impact.

And that is precisely what cutting the gas tax would do. It might not double the amount that Americans drive, but it would increase the consumption of oil. Families that might have decided to spend the weekend at a local state park might decide to drive to Florida after all (unless they live in Florida, then they'd probably drive to California). Instead of being a responsible Senator, and suggesting that Americans use alternative methods of vacationing (such as taking Amtrak), he has proven that pandering is on his agenda.

If Senators McCain and Clinton truly feel that the United States can do without the $1 billion in transportation improvements around the country, perhaps they could find a way to keep the gas tax and spend that money on social services or buying carbon credits.

Just like free parking and free freeways has led to an overuse of those venues, cheaper gasoline will encourage drivers who could use other modes to drive. Transit agencies around the country have seen huge ridership gains since gas prices started escalating. Whether you take the subway or not, it's good for you. Every person who doesn't use gallon of gas for their commute leaves a gallon of gas for you or for the trucker delivering your supermarket's milk.

I never liked economics courses, but I did learn a few things in them. If supply is constant and demand increases, price goes up. By keeping gas prices high, we encourage those who can to switch to transit or reduce their car trips, which makes gas marginally cheaper for those who live too far from transit or who do have to drive.

In the long run, making Americans pay for the external costs of their oil addiction will reshape society by making transit accessible to more people and creating more walkable communities. If these oil prices are just a periodic upswing, this will better prepare us for the next shock. If this is the actual peak of world oil, which some are saying already, these prices will only go up.

If our presidential candidates are serious about stabilizing the economy, they will support an increase in the gas tax. This will help reduce our dependence on oil, extend the endpoint of the oil era, and ensure that we won't have any silent springs in the near future.

Candidates would also be wise to stop blaming the oil companies. Even they are starting to see the light and diversify. After all, why else would Beyond Petroleum (better known as BP) go beyond petroleum? The lesson learned by OPEC during the disco era is one not easily forgotten in the oil industry. Even in the car-dominant United States, oil consumption didn't recover for years after the 1979 crisis. It took OPEC six years to recover from the drop in demand, and I assure you, they are not eager to repeat that crash course in economics. If our economy is reliant on oil, then their economy is reliant on our reliance on oil.

As proof-positive of the trend to reduce oil consumption, the Post had an article just yesterday on how America's railroads are having a resurgence in popularity. Trains are four times more efficient as tractor-trailers. This is good for our economy and it's good for the consumer--in the longer run. In the near-term, we will face some painful decisions, however. During this time, which is hard for all of us, we need to learn to pull our fair share. And we need policymakers who will leverage the economy to wean of us of our oil fix and at the same time create green jobs.

We only have this one Earth. Let's celebrate her. And remember that every day should be Earth Day.

Happy Earth Day America!


fpteditors said...

Supply and demand will replace the gas tax holiday with an immediate and equivalent price rise. It is a $10B giveaway to the carbon-auto industry. It makes sense that McCain is for it, but why is Clinton for it? That is a question people should be thinking about.



Matt'' said...

That was one of the most logical, well-reasoned articles I've ever read about oil consumption. I'll remember it the next time a politician argues that environmental protection should "not be allowed to harm the economy".

john said...
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