April 7, 2006

April 7, 2006 | WebMemo on Energy and Environment

The Right and Wrong Way for Washington To Address High Gasoline Prices

After four years of delay and debate, Congress finally passed the big energy bill last August. More than anything else, public anger over high gasoline prices pushed it over the top. But so far, the impact of this law has been to increase gas prices. Consequently, Congress has introduced a host of new energy legislation. Some of these proposals would help, others would hurt, and it is easy to distinguish the two. The good ideas seek to expand free markets by increasing domestic energy production and streamlining energy regulations. The bad ones would raise energy taxes and increase the regulatory burden.

 

The Good

Expanding Domestic Energy Production: In a time of high oil prices, high natural gas prices, and political uncertainty in many oil-producing nations, America should make good use of the energy available here at home. But thanks to restrictions put in place years ago when energy was much cheaper, many promising areas in the U.S. are off limits to oil and gas production.

 

Unfortunately, provisions to expand domestic energy production were dropped from last year's energy bill, making the final version far less effective than it could have been. Unlike much of what did survive in the energy bill, these measures could have reduced energy prices. Fortunately, it is not too late to enact them now.

 

A provision allowing access to the estimated 10.4 billion barrels of oil in Alaska's Arctic National Wildlife Refuge (ANWR) is currently being considered as part of the congressional budget process. It has already passed the Senate but faces hurdles in the House. In addition, several bills seek to open up restricted offshore areas, either by explicitly allowing drilling in new areas or by giving states the authority to opt out of current restrictions and permit drilling off their coasts.[1]

 

Streamlining Energy Regulations: Not only has oil become more expensive, but the cost of turning that oil into gasoline has also increased. This is due partly to expensive and complicated regulations that dictate the recipes for gasoline (more than a dozen of them) and other regulations that have made it difficult for refineries to expand to meet growing demand. Last year's energy bill took only modest steps to reduce the red tape strangling gasoline production, but Congress has proposed several new measures.[2] These bills would reduce the number of different fuel blends in use and expedite the regulatory process for expanding oil refineries. Both are good ideas that could alleviate gasoline price spikes, especially in the summer months.

 

The Bad

Raising Taxes: Whether aimed at the oil companies or at consumers, tax hikes are no way to help provide gas price relief and would only make things worse. Anger over rising gasoline prices and record oil industry profits has led to bills that would raise taxes on the industry.[3] Such taxes would not lower gasoline prices but would do damage over the long term. The oil industry is already heavily taxed, and raising taxes further would only reduce the profits the industry needs to invest in new exploration and drilling. Past experience with oil industry tax hikes confirms that the energy end-user ends up paying the price, and there is no reason to think it would be different this time.

 

In addition, some are urging Congress to sharply raise the gas tax, though thankfully no such bill has yet been introduced. The last thing consumers struggling with $2.60-a-gallon gas need is the government deliberately raising the price even higher.

 

Regulating Fuel Economy: The Bush Administration recently tightened the federal corporate average fuel economy (CAFE) standards for SUVs and pickup trucks, but activists immediately declared the new standards inadequate. Some in Congress wish to see much tougher standards, essentially mandating smaller but more fuel-efficient vehicles.[4]

 

This would be bad news for consumers. Fuel-efficient vehicles are already available for those who want them, including a growing number of gasoline-electric hybrids. Consumers would gain nothing by having the government step in and force this choice on everyone. And there is much to lose, given that downsizing vehicles to meet tough new standards makes those vehicles less safe. As it is, fuel economy standards have increased the highway death toll by 1,300 to 2,600 deaths per year, according to a 2002 study by the National Academy of Sciences.[5] Sharply higher mileage standards would cause more deaths and are not a smart way to deal with high gasoline prices.

 

Expand Markets, Not Government

These are only a few of the ideas being discussed in Washington to address with high gasoline prices. More will certainly be proposed, especially if prices continue to rise into the summer months. Proposals that respond to America's energy challenges by expanding energy markets and consumer choice are worth pursing. But those that propose higher taxes or more regulation would harm consumers and should be avoided.

 

Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.



[1] See S. 2253; S. 2290; H.R. 4318; H.R. 4761.

[2] See S. 1772; H.R. 3893.

[3] See S. 1631.

[4] See S. 1648.

[5] National Academies Press, "Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards," 2002.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Energy and Environment