Price of Gas – Curse or Blessing

Monterey County Herald, Sunday, May 7, 2006
By Leon E. Panetta
In our democracy, we govern by leadership or crisis.  In the absence of leadership, crisis drives policy.  Today, we are a nation largely governed by crisis. No issue reflects that political reliance on impending disaster better than energy.

It was not long after I was first elected to Congress in 1976 that the Carter Administration faced the consequences of the Islamic Revolution in Iran and the Iran-Iraq War.  Both events severely cut oil production and inflated gas prices.  The price of oil soared to $34.00 a barrel ($110.33 in 2005 dollars) and gas prices rose as high as $1.50 a gallon ($4.87 in 2005 dollars).

President Carter called achieving energy independence by 1990 the “moral equivalent of war,”  imposed an oil import quota, created the federal Department of Energy, established a $20 billion synthetic fuel program, passed tax incentives for conservation and the use of alternative fuels, and signed a windfall profits tax on oil companies.

As soon as OPEC opened up the oil spigot, the energy  crisis gradually went away and we got hooked on cheap Mideast oil again.  President Reagan repealed or dismantled most of Carter’s energy measures and oil and gas prices fell during the 1980s.

Before Carter, President Nixon was challenged by the Arab oil embargo.  Gas prices jumped and shortages had people waiting in long lines for gasoline.  Nixon backed price controls, gas rationing, and lowered the national speed limit to 55 MPH.  He called for the U.S. to be energy independent by 1980.  Most of the Nixon measures are now gone, almost all of the states have repealed the 55 MPH speed limit, 1980 has come and gone, and we are still not energy independent.

Today, 33 years after Richard Nixon pledged that we would be energy independent by 1980, 29 years after President Carter committed to energy independence by 1990, this nation again faces another energy crisis.  With supply problems in Iraq, Nigeria and the Gulf of Mexico, coupled with nuclear tensions over Iran, President Bush has pledged that we will cut imports of Middle Eastern oil by 75 percent by 2025.  Another energy independence date.  He now says we are addicted to oil and backs a $2.1 billion program for new technologies and alternative sources of energy.  It was not that long ago that he signed a major energy bill that provided billions in tax incentives to oil companies to keep us addicted to oil.

Gas prices keep rising because of our dependence on oil with some analysts predicting $5.00 a gallon gasoline by the summer.  And, of course, the public is now mad as hell at those who failed to prevent this crisis.

Both political parties are scrambling to respond.  President Bush has demanded an investigation of price gouging, a temporary repeal of clean air rules, greater fuel efficiency, and a temporary suspension of deposits into the nation’s strategic petroleum reserve.  Even Bush administration officials, including the Secretary of Energy, have acknowledged that none of these steps will have much of an impact on high gas prices.

Democrats have said that all of this is too little too late and are arguing for a windfall profits tax in the light of the $16 billion in profits reported by the oil companies and a 60 day suspension of the federal gas tax.  But they too admit that gas prices are likely to remain high.

The problem is that none of these proposals go the heart of the problem – the price of gas is largely fixed by a global market that responds to demand and global threats to supply.  Consumption is growing at a rate of at least 3 percent a year.  Total energy consumed will rise by about 50 percent  in the next two decades.

China is planning to add about 120 million new vehicles to its fleet and India will expand its fleet as well.  Russia and the other countries of the former Soviet Union are beginning to grow at rapid rates increasing their use of oil.  The U.S. continues to burn about 21 million barrels of oil a day, 12 million of which is imported.  California alone consumed more than 16 billion gallons of gasoline in 2005, according to the California Energy Commission, far more than residents of any other state.  And years of relatively cheap gas have spurred a booming market in gas guzzling SUVs and big cars that are now strangling families at the pump.

Added to this growing demand for oil is the instability in supply.  Two-thirds of today’s oil reserves and 40 percent of its overall production are controlled by the 11 member organization of petroleum exporting countries known as OPEC. Without equivocation, their goal is to keep the world dependent on imported oil for as long as possible, even as demand increases and tensions rise in the region.  Problems in Iraq, Iran and Nigeria, a reduced refining capacity in the U.S. because of Katrina and increased speculation in the global oil markets guarantee that the price of gas will only continue to rise regardless of any presidential or congressional action.

Obviously, politicians find it difficult to acknowledge impotence in the face of crisis.   So it is likely that both the President and the Congress will promote a set of initiatives that, as in the past, will convey the impression that they are doing everything possible to reduce the price of gas:  $100 rebates, price gouging investigations, efforts to promote greater fuel efficiency and alternatives, another struggle to open up the Arctic National Wildlife Refuge to drilling, and even an effort to repeal the $2.1 billion in tax breaks handed the oil companies in the recent energy bill.  All placebos aimed more at political survival than reducing gas prices.

As we have learned from past failures, the fundamental challenge rests not with policymakers in Washington, but with consumers throughout the nation..  As long as businesses and families remain dependent on oil and are willing to pay high prices for gasoline, the price of gas will continue to rise.  In the end, it may very well be the price itself, rather than any mandate from Washington, that may have the greatest impact on changing human behavior when it comes to energy.  It is only when the public begins to demand more gas efficient vehicles, and uses more mass transit, car pools and fuel alternatives that the market will respond.

Of course, government can help in the long-term.  Ethanol could very well replace all of the gasoline Americans use if government were willing to invest in a crash research program to develop ethanol from agricultural waste, wood chips and prairie grasses.  Cellulosic ethanol is more useful than corn ethanol because it requires far less energy to produce and emits fewer greenhouse gases.  An ethanol infrastructure is already in place and given enough financial support and political will, it could be an important step in ending America’s oil addiction.  But these steps to promote conservation and more efficient transportation systems will take years to develop and will depend on public support and demand.

The most important lesson of the past is that administrations that pledged energy independence failed because they failed to change the most important factor involved in energy policy – human behavior.  It is not government but consumers that hold the key to smart energy policy in the future.  What all of the presidential pledges of the past failed to do, the price of gas may just accomplish.  It may not be pleasant to confront the prospect of $5.00 or higher a gallon gasoline but if that high price can ultimately create a demand for less oil and more alternative fuels like ethanol, then perhaps this high price may not just be a curse but a blessing.

Leon Panetta is a former congressman and White House chief of staff whose column appears regularly in Commentary. Readers may write to him at the Panetta Institute, 100 Campus Center, Building 86E, CSU Monterey Bay, Seaside, CA 93955.


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