The costliest error may be cheap fuel

21 May 2004

Instead of getting mad about high gasoline prices, should we be cheering?

Two-dollar gas has become the issue DU JOUR for the Kerry campaign, and no wonder. It hits most everyone in the pocketbook, and it's easy to put the blame on the Bush administration.

At the same time, on the other hand, Democrats are ripping into George W. Bush's energy policies: We consume too much oil, we don't push renewables hard enough and we don't conserve - all of which pollutes our environment, causes global warming and makes us far too dependent on foreign oil.

You can't have it both ways. If Kerry really cares about all of those energy issues, then he should (at least quietly) be applauding increases at the pump. In fact, if Kerry is successful in his drive to push prices back down, then the problems Democrats decry will just get worse.

The reason is straight-forward: Humans are economic creatures. We do what price signals tell us to do, jawboning from on high or edicts from governmental regulators regardless. If gas is cheap, we'll use more. Expensive? We'll use less.

Step back a moment to consider the reasons people worry about fossil fuels. The most compelling is global warming. The basic problem is that combustion of any fossil fuel - gasoline, oil, coal or natural gas - produces carbon dioxide and other greenhouse gases that enter the atmosphere, trapping heat from the sun and ultimately causing temperatures to rise. So far, the only way we know to solve the problem is to reduce those greenhouse gases. That, ultimately, means using less in the way of fossil fuels.

Some of the other reasons are weaker. Yes, fossil fuels pollute the air and oil spills can mar the environment. Yet both can be managed through technology and regulation. (Cars that meet California's latest standards, for example, have close to zero emissions.)

It's also true that the United States depends to an inordinate degree on foreign oil. The OPEC cartel can pose a real risk - as it did during the 1970s embargoes - but the right response is not refusing to buy from overseas but rather diversifying our sources and putting in place a backstop. We largely did the latter in 1974, by the way: The Strategic Petroleum Reserve currently has 700 million barrels.

And how about the fear that we will run out? It's a myth. Oil won't simply disappear. Rather, it will just get more expensive to extract. That eventually will drive prices up, pushing us to use other energy sources. But it's not as if we'll wake up one day and every well will be dry.

Still, grant that it makes sense to reduce the use of fossil fuels, and, further, that a forward-looking energy policy would act to encourage both conservation and the development of alternatives. How do we do that?

Not by cutting the price of gasoline.

Hybrid cars such as the Toyota Prius, for example, get terrific gas mileage. However, they cost more than comparable cars using conventional engines. If gas prices remain high - or if they go up even further - it's a safe bet that demand for hybrids and other fuel-efficient cars will increase.

But what happens if gas prices drop? Actually, we know. In the 1990s, prices dropped from a high of $1.34 in 1990 to a low in 1998 of under a dollar. Not coincidentally, Americans started to buy bigger and less efficient cars, including, of course, every environmentalist's bane, the SUV. On top of that, we all started driving more. And why not? Gas only cost a buck!

The same reasoning applies to alternatives, such as electric cars. They may be technologically feasible, yet they don't make economic sense as long as gas is inexpensive.

Some acknowledge the importance of prices but argue that government action can substitute for them. Tax the gas guzzlers, for example. Force manufacturers to build efficient cars. Use tax incentives and subsidies to encourage efficiency and alternatives.

They're wrong. Regulation is far less effective than prices in changing behavior. At best, tough regulation and low prices send a mixed message. In addition, the effects of regulation can be perverse - we may compel more fuel-efficient cars, for example, but then people will just drive more because of cheap gas, or they may figure out ways around the rules (which is what happened with SUVs). Moreover, if gas is inexpensive, the political support for regulation is hard to maintain.

Indeed, the link between gas prices and energy consumption is so obvious, one wonders at Kerry's sincerity. Everyone likes to complain about high prices, and I suspect Kerry can't resist taking a jab at the administration. Yet should he win, Kerry (who once supported a gas tax for exactly the reasons I've outlined above) will find his rhetoric far from reality. Cheap gas really doesn't square with a commitment to the environment.

Talk back to Tom Keane at tomkeane@tomkeane.com.