The Wrong Energy Policy
Commenting today on President Bush’s proposed energy program, Charles Krauthammer, who I usually like, just gets it completely wrong:
First, tax gas. The president ostentatiously rolled out his 20-in-10 plan: reducing gasoline consumption by 20 percent in 10 years. This with Rube Goldberg regulation — fuel-efficiency standards, artificially mandated levels of “renewable and alternative fuels in 2017” and various bribes (er, incentives) for government-favored technologies — of the kind we have been trying for three decades.
Good grief. I can give you 20-in-2: Tax gas to $4 a gallon. With oil prices having fallen to $55 a barrel, now is the time. The effect of a gas-tax hike will be seen in less than two years, and you don’t even have to go back to the 1970s and the subsequent radical reduction in consumption to see how. Just look at last summer. Gas prices spike to $3 — with the premium going to Vladimir Putin, Hugo ChÃ¡vez and assorted sheiks rather than the U.S. Treasury — and, presto, SUV sales plunge, the Prius is cool and car ads once again begin featuring miles-per-gallon ratings.
No regulator, no fuel-efficiency standards, no presidential exhortations, no grand experiments with switch grass. Raise the price, and people change their habits. It’s the essence of capitalism.
It’s unclear that Krauthammer is correct in his assumption that raising the price of gasoline will have a significant impact on demand. During the recent run-up in the price of gasoline, when prices in some parts of the country exceeded $ 3.50 per gallon, there was no apprecable impact on demand for gasoline. This isn’t to say that gasoline is immune to the laws of supply and demand, though, because it’s likely that people were simply making the choice to swallow the increased price (because they need the gasoline to power their cars) and cut back spending in other areas.
What higher gas prices will do, though, is harm the economy as a whole. Forced to pay more for the gasoline they need for their cars, people will cut back in other areas. We saw signs that this was happening last year.
Furthermore, raising taxes will increase the price, but it will be an artificial increase unrelated to real market conditions. It will divert investment toward the oil and gas industry and way from other industries. And it will take money out of the pockets of consumers.
Krauthammer goes on to advocate drilling for oil in ANWAR and reducing the regulations that prevent the construction of new nuclear power plants. Both of these are good ideas. But his first suggestion, raising the gas tax, is completely wrong headed.