From the May 11, 2008 The Sunday Times (London)
May 11, 2008
by Irwin Stelzer
ASK the wrong question, and you get the wrong answer. The question being asked by Hillary Clinton and John McCain - and that covers just about the entire political spectrum - is, “How can we lower petrol prices?”
Their answer: reduce the federal tax of about 18 cents per gallon. The reasons that is exactly the wrong policy are too many to list here. One is that oil producers, or oil companies, or service-station operators would raise prices by an equivalent amount. But give the pandering pols the benefit of the doubt, and assume that prices would go down. The right question is: “Is it a good idea to lower petrol prices?” The right answer is “no”.
Lower petrol prices would encourage Americans to drive more, use more petrol, emit more pollutants, and increase the demand for crude oil. So regimes hostile to America would sell more oil. Venezuela’s Hugo Chavez, whose government owns some 8,000 petrol stations in America, must be astonished to learn that leading American politicians are eager to increase his revenues. And the Saudi financiers of jihadists and Wahhabi mullahs who fuel antiAmericanism would be pleased to have a few extra hundred million. So would Vladimir Putin.
Better that, figure our politicians, than to take the political risk of increasing taxes on petrol, reducing demand and getting to the consumers’ wallets before Opec (the Organisation of the Petroleum Exporting Countries) and the unfriendlies do.
The wrong question - how do we lower prices - also creates pressure to stop the flow of oil into the Strategic Petroleum Reserve. Stop buying oil, critics tell George Bush, and demand pressures will ease. Better still, sell off some of the reserve, and increase crude supplies. Either might drive down prices and, unfortunately, increase imports - or have only the effect of reducing our ability to confront a supply cut-off.
The next wrong question is “How can we replace crude oil with renewable sources of energy?” Answer: subsidise construction of wind turbines, solar panels, nuclear plants, and production of corn. But neither wind turbines nor solar energy, on the cheeriest of assumptions, can make a significant dent in the demand for crude oil and its products. And they are expensive. As for nuclear, few of these costly plants will be built unless subsidies are offered to private-sector players, licensing proceedings are shortened, and an acceptable means of disposing of nuclear waste developed. None of these is likely.
Which leaves corn. Saddam Hussein famously operated a UN approved oil-for-food programme - Iraqi crude was allowed onto the market despite UN sanctions, with the proceeds supposed to be used to pay for food for starving Iraqis (and Black Label booze for Saddam & Sons). Now politicians around the world have decided to answer the question of how to develop substitutes for oil-based products with a food-for-oil programme. Farmers are being paid huge subsidies to grow corn to be converted into ethanol, a petrol substitute.
The answer produced by the wrong question has serious consequences. For one thing, the negative environmental impact of biofuels seems to outweigh any advantages. Among other things, subsidising biofuels increases the use of fertiliser, causing a run-off that pollutes streams and rivers; pays farmers to cut down forests to increase the planting of oil-substitutes; and induces farmers to convert acreage previously devoted to growing food to growing fuel. By constricting food supplies, ethanol madness has contributed to the rise in food prices that is afflicting mostly poor people around the world. In essence, rich countries are trying to find a way to fill their petrol tanks at the expense of empty stomachs in Africa, Mexico, and parts of Asia.
So what are the right questions? First, have any of the programmes proved counterproductive? Answer: yes, several have costs that exceed their benefits. The best example is the attempt to grow our way out of the energy problem. Admit we have erred, and wind down the subsidies.
Second, are there cost-effective ways of increasing the supply of crude oil? Probably. Studies that showed that the environmental cost of drilling in Alaska and offshore Florida and California exceeded any benefit from new discoveries are now out of date. The benefits were estimated when oil prices were less than half current levels. So the benefits of stepped up exploration have multiplied with the increased price of oil, while much has been learnt about reducing the environmental impact of such drilling.
Final sensible question: “Can anything be done to increase supplies of oil from the world’s important suppliers?” Answer: yes, if there is the will to act. The Saudi regime depends on the American military umbrella for its long-term survival, the Mexican government depends on remittances sent to poor Mexican families from the millions of its citizens working in America, and the Opec cartel exists only because the State Department prevents the antitrust authorities from breaking it up. A serious American administration would be capable of explaining to the Saudis, Mexicans and Opec that continuation of these indulgent policies is dependent on their willingness to allow western firms to develop new reserves and wring more oil from existing fields in their countries, and to remove cartel restrictions on current production.
Unfortunately, the right questions are precisely the questions that politicians abhor. Asking them produces politically difficult answers. Wrong questions and silly answers might be one reason Goldman Sachs is talking about $200 oil. Remember: these are the guys who were laughed at when they predicted the oil price would hit $100.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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