By Paul Sabin | May 27, 2004

Drivers experiencing sticker shock at the gasoline pump this Memorial Day weekend have every right to feel beleaguered. Prices have soared above $2.40 per gallon at Chicago-area gasoline stations and are at record levels nationwide. Adjusted for inflation, gas prices are the highest they’ve been since the mid-1980s.

Is this the end of two decades of low gasoline prices? If so, what should we do about it?

With China’s energy use surging and global oil production flat, many energy analysts are predicting a long-term tightening of oil markets and even an imminent end to the Age of Oil. Whether or not the current price surge spells the beginning of a lasting energy transition, businesses are clamoring for relief. United Airlines estimates that higher fuel prices will cost the company $750 million more this year than it expected to pay as recently as December. To help cover the expense, the airline this week increased its fuel surcharge by $10 for round-trip flights. Chicago taxicab drivers are petitioning for a fare increase to cover their costs and last week Los Angeles imposed a 50-cents-per-trip fuel surcharge for taxi rides. Businesses also worry that their sales will fall as consumers feel pinched at the pump: Wal-Mart Chief Executive Officer Lee Scott recently complained that the higher gasoline prices have taken $7 a week in discretionary income from the company’s budget-conscious customers.

Faced with this unrest, politicians will be tempted to try to drive oil prices back down. President Bush has resorted to urging again the passage of his stalled energy bill, which would open the Arctic National Wildlife Refuge to drilling and provide more than $20 billion in tax breaks and subsidies to encourage energy production.

These tactics are no surprise since pushing down oil prices has been the dominant energy strategy of the United States for the past 100 years. Federal tax subsidies like the oil depletion allowance allowed oil companies to deduct more than a quarter of their gross income before taxes. Generous land policies gave public oil reserves away at low cost, from the sweetheart deals of the 1920s Teapot Dome scandal to the Bush administration’s recent auction of 40,000 acres of land for oil and gas leases near Dinosaur National Monument. Diplomatic and military efforts have kept oil flowing from the Persian Gulf, Mexico and Venezuela.

The question today is whether it continues to make sense to use taxpayer money, military resources and environmental treasures to ensure that oil stays cheap and available to American consumers and businesses. We don’t calculate these costs of cheap oil into our tab at the gasoline pump. But we should.

Excessive dependence on oil has led us to dangerous entanglements with oil-producing nations in the Persian Gulf and around the world. Rapid consumption of fossil fuels also is transforming the climate and natural ecosystems worldwide. Yet there are other strategies for meeting our energy needs.

After the first oil crisis in the 1970s, energy guru Amory Lovins wrote in his book “Soft Energy Paths” that Americans do not want energy itself, but the things that energy brings–comfortable homes, mobility and a dynamic economy. Lovins’ point, which he still advances from his perch at the Rocky Mountain Institute think tank, remains relevant today.

Subsidizing cheap oil is only one of many ways to put money in people’s wallets and to fire up the nation’s economic engines. If higher gasoline prices are cutting discretionary income, why not lower payroll taxes to boost consumer spending? If we want to spend taxpayer money to create jobs and develop American technology, and at the same time wean ourselves from oil, why not offer more tax incentives for fuel-efficient vehicles or invest federal money in hybrid vehicle technology or wind power?

In our current energy system, we have confused inexpensive energy with economic stimulus, and that has become a self-fulfilling diagnosis. The longer we keep oil prices low, the more we channel businesses and consumers to invest in technologies, like sport utility vehicles, that depend on cheap gasoline. Their investment then locks our economic well-being into a continued supply of cheap energy.

To be sure, in the near-term changing this dynamic will be painful. It will mean allowing the price of energy to rise. Consumers and businesses who invested in property or technology presuming low oil prices could face sharply increased and unexpected costs. If you bought a Ford Excursion last year, for example, you probably didn’t factor in this year’s $20 price increase for filling your 44-gallon fuel tank. Similarly, whole economic sectors like the airline industry will have to adjust if oil prices stay high, which means we all may end up paying more to fly.

Painful as these adjustments may be, they are necessary if we are going to reduce our dependence on Persian Gulf oil and begin to address the problem of climate change.

In contrast to President Bush, presidential hopeful Sen. John Kerry isn’t reverting to the tired old formula of putting wilderness lands, taxpayer money and national security on the line to lower the price of oil for a few more years. Kerry last week laid out a promising two-part strategy to temper short-term price increases while developing a long-term energy plan. Calling our independence from Middle East oil the “great project for our generation,” Kerry proposed stabilizing energy prices in the short-term while rapidly advancing energy efficiency and alternative fuels. Rather than tax credits for oil production, he advocates tax credits for fuel efficiency.

In their responses to rising oil prices, the presidential candidates differ starkly and tellingly. While the oil men in the White House cling to the costly policies of the past, Kerry’s energy policy emphasizes efficiency and technological innovation to deliver the things that we want from energy. As today’s high gas pump prices auger, that approach is a better match for the new century.

Paul Sabin is a senior research scholar at Yale Law School and executive director of the non-profit Environmental Leadership Program. His book, “Crude Politics: The California Oil Market, 1900-1940,” will be published in November.


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