Thursday, May 04, 2006

David Strom on politicians and gas prices

Posted by Craig Westover | 2:12 PM |  

David Strom, President of the Taxpayer's League, from today's Pioneer Press.
Supply and demand, not politicians, make gas prices go

Don't believe it when the politicians say they can do something about high energy prices.

Every political figure, great and small, is rushing to denounce high gas prices and the horrible effects they are having on the average American. And what's not to complain about? High gas prices really are bad, cutting into every family budget in a way that hurts.

But what the politicians don't tell you — because it goes against their interests, is that there is precious little they or any government official can do to lower energy prices in the short run. In fact, at least some of the blame for the current woes we face belongs to the very politicians who are complaining loudest, because of decisions they made years ago.

The simple fact is that energy prices are so high today because of a classic supply-and-demand crunch — the world economy is humming along, making the demand for energy and especially oil very high, while decisions made years ago to restrict the search and drilling for oil in the United States are coming back to haunt us. Add in political instability in the Middle East and other oil-producing countries like Venezuela, and you have a recipe for pain at the pump.

Politicians — never ones to let the basic facts get in the way of a good yarn — have been out in front of the cameras trying to sell a bill of goods to the American public.

The stupidest "solution" hardly merits comment: a "windfall profits" tax on oil companies simply ignores economic reality. Gas prices aren't so high because of price gouging by oil companies; they are high because the supply is tight and global demand is high and growing.

The most-often touted "solution" to high oil prices is expanding our use of biofuels, especially ethanol and biodiesel, as a substitute for conventional crude oil. It stands to reason that every gallon of fossil fuel that we replace with a biofuel will reduce our dependence on foreign oil and relieve the price crunch.

There is only one problem with that argument: it just doesn't work in reality. Ethanol prices track with gasoline, which has led to a doubling of the price over the past year. And that doesn't include the price of the federal and state subsidies that are paid to ethanol producers, which of course are really paid by taxpayers. And even if we could somehow dramatically increase the amount of ethanol we make (right now we only make about 3 percent to 5 percent of the ethanol we would need to replace gasoline), it would take 97 percent of the U.S. landmass to grow enough corn to produce the ethanol we would need to run our cars.

The same is true for biodiesel. There just isn't enough land in the United States to grow enough corn and soybeans to fuel our automobiles, not to mention feed us. Brazil is using sugarcane to make a more economically viable ethanol from sugar cane — but right now the U.S. government has a 54-cent-a-gallon tariff on foreign ethanol to protect the domestic industry.

The simple fact is, as the world economy grows and China, India and other Third World countries start using more oil, no one solution to the energy crunch will solve our problems. It makes a lot of sense to increase our use of cost-effective renewable fuels where we can, especially expanding our use of nuclear and hydroelectric plants. Left alone, the market would do precisely that.

Here's the best way to deal with the energy price crunch: First, do what we can to expand the supply by allowing the drilling of known oil reserves; second, encourage the public to alter its behavior in response to the new supply-demand equation; third, allow the market to find the most viable alternative energy solutions.

High prices will naturally stimulate changes in the behavior of energy-inefficient economies, especially China, leading to a slowing of demand. The high price of gas will lead more of us to buy gas-efficient cars, which will do more to reduce demand than ethanol or biodiesel ever could.

Prices rise and fall based on supply and demand. As oil becomes pricey, new technologies will be developed to replace it or make it more efficient. Entrepreneurs trying to make a buck — not politicians trying to buy your vote — will help us out of our current bind.