Tuesday, April 25, 2006

How to Lower Gas Prices

Gas prices are high, and many Americans want the government to do something about it. Democrats, of course, are pandering to this generally uninformed group.

Oil prices have risen rapidly recently because of the fear of disruption in international supplies (think Iran), the seasonal changeover to producing gasoline, and the switch to ethanol in gasoline. Long-term factors include the industrialization and increasing wealth of China, India, and other developing countries.

In the short run, the government can do little to influence the price of gas, except to introduce price controls, which cause more economic damage, or to cut the gas tax, which is politically difficult. Consumers in the aggregate have more control over gas prices in the short run by reducing consumption of energy, but much demand for energy can not be discontinued immediately.

In the long run, high prices encourage oil companies to find more oil and to produce more from known deposits and encourage consumers to conserve. Recall what happened when oil prices tripled in the late 1970s. Oil companies produced more oil, and energy consumers made buildings more energy efficient, bought smaller cars, and arranged their lives in numerous ways to reduce energy consumption (for example, moving closer to work). After a few years, the increased production and decreased consumption caused oil prices to plummet. The oil industry went into a depression that lasted nearly a decade.

Government has taken some actions that decrease the supply of oil and increase its price. Several states (for example, California and Florida) do not allow offshore drilling. Pres. Clinton restricted drilling on federal lands and vetoed a bill to drill in the Alaska National Wildlife Refuge (ANWR). If you support these measures, you have no right to complain when the measures decrease the supply and contribute to higher gas prices.

Democrats still strongly oppose drilling in ANWR. In fact, Senate Democrats in December filibustered a bill that would have allowed drilling in ANWR. Drilling in ANWR would probably produce more oil in a few years than any other single action.

Environmentalists and ordinary Americans oppose building facilities to generate energy or to make energy products such as gasoline or fuel oil. No one has built an oil refinery in the U.S. since the late 1970s or early 1980s. One business group has been trying without success for 10 years to get a permit to build a refinery in Yuma, Arizona. No one has started building a nuclear power plant in the U.S. since the 1970s. Sen. Kennedy (D-Mass.) and other environmentalists opposed the building of wind turbines offshore near his place on Nantucket Island.

Several politicians are suggesting a tax on oil companies' excess profits. If such a tax is passed, the perverse result will be higher gas prices. The tax will increase the cost of gasoline, which will reduce the supply, which will increase the price. This is basic economics, but politicians are not known for their economic knowledge and wisdom.

To achieve lower gas prices over time, allow drilling in ANWR. This will be a political struggle in Congress, but no other measure will impact the supply and price of gas as much. Streamline the permitting process for nuclear and other power generating plants and for oil refineries. The environmental hurdles in particular need to be more reasonable.

Also reduce the number of gasoline blends that must be produced across the U.S. The regional environmental goals can still be met.

Eliminate the requirement to use ethanol. Since the requirement was put in place, the price of ethanol has risen significantly. The former requirement to use MTBE turned out to be unwise because of health concerns; the current requirement to use ethanol appears unwise on price concerns. Set the output maximums for gasoline exhaust, and let the oil companies determine how to meet the standard.

Open federal lands, except for the really precious national park locations, to drilling.

Allow offshore drilling in every state. If a state refuses, withhold federal funds for highways in the state, or increase the federal gas tax in the state.

These proposals will increase the supply of oil and will therefore reduce the price of gas. Measures to penalize the oil companies will only decrease the supply of oil and cause the gas price to go up.

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