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Monday, August 07, 2006

Key to energy reform: Let our oil prices soar

It will take tough love and market realism to spur alternatives to America's dependency on petroleum

By Dennis Byrne
Chicago Tribune

I'm rootin' for higher gas and oil prices.

And honest environmentalists would admit that they are too.

Am I insane? No more insane than folks who would wait until the oil gauge is on empty and gasoline is at $80 a gallon. Having higher oil prices now is the only way to brake oil consumption and develop other ways to fuel America. No amount of government decrees will do it. No recycling or conservation. No appeals to give up Humvees and other rolling tanks. Money being the biggest economic motivator, $5- to $10-a-gallon gasoline would be crippling now to a world economy built on oil. But it would be the only way to set off an energy revolution of the sort that changed American in the mid-1800s when we began our oil dependency.

This time, revolution will be harder. Changing the energy-consuming habits of nearly 300 million Americans producing a gross domestic product of $12 trillion will be significantly harder than it was to get 31 million Americans and their $74 billion economy to shift from horses to petroleum.

But if we wait until the oil gauge hits zero, it's not unreasonable to predict a worldwide economic meltdown and a return to an agrarian society.

Cities with horse-drawn carriages and streetcars. Suburban wastelands, with the wind blowing through abandoned big-box stores; weeds on the interstates and massive deforestation as millions of people chop wood for heat.

The project by Tribune correspondent Paul Salopek on "The Twilight of the Oil Age" in the July 30 Chicago Tribune lays it out in fearful detail.

So, better to get the economic shock over with well before then. That will happen only if we start to pay the real cost of energy. Salopek quotes one economist who believes that the true cost is $8 a gallon, and runs as high as $11 when the cost of war to protect our Middle East oil sources are thrown in. At that price, Americans might finally get serious about making fundamental changes.

Only when American consumers demand energy alternatives will the business world start providing economical and workable alternatives. The current level of demand for hybrid cars won't come close to doing it. Neither will higher government-imposed mileage standards. Clearly, $3 a gallon hasn't done it.

So, how can Americans be billed the full amount? For one, we can take the politics out of pricing. Here's a great example: Michigan's Democratic Gov. Jennifer Granholm is running for re-election on a platform of keeping gasoline prices "low," whatever low is.

She'd cap "outrageous profits" and issue the usual "call on Washington to do something, because it hasn't done enough," whatever enough is. Such gasoline populism, with its fake promises, only worsens the calamity when the tank runs empty.

In other words, politicians should stop feeding public expectations that lower prices are normal, and can be achieved by a political process. They need to restrain themselves when they're tempted to blame conspiracies for shortages and higher prices, such as those created by Hurricane Katrina.

Environmentalists and others who crab about the scourge of the suburbs should openly support higher prices. How better to end suburban creep across the countryside and encourage the resettlement of the city neighborhoods and inner suburbs? (Of course, that would increase the demand and force up prices, thereby reducing the supply of affordable housing--something that affordable housing advocates shouldn't overlook.)

This pre-1950s Utopian vision of the metropolis is, of course, naive. It doesn't take into account the computer and telecommunications revolution, which reduces the need for physical proximity and face-to-face communications in our daily affairs. Thus reducing the need for travel.

Some people, who still require close contact in their social and business lives, would gravitate back to the city, but I believe we've entered an increasingly footloose society.

Instead of the suburban blob slowly spreading and inundating the countryside, I see a different future: more Americans settling in more livable, human-scale satellite towns, spotted throughout the countryside.

Of course, while we wait for settlement patterns that more realistically reflect our technologically advancing society and as we shift toward more efficient means of energy production (yes, it has to include nuclear), pain--a lot of it--will be felt. Government's job, to the limits it can, will need to create policies that ease that pain.

"Market forces" aren't always the best way to magically eliminate what economists call "dislocations." But continued pretending that prices won't or shouldn't go still higher will bring us all to ruin.

Copyright © 2006, Chicago Tribune


Anonymous said...

That's a nice utopian fantasy, but remember, the price of EVERYTHING will go up. Will you mind paying $5 a pound for produce, or $10 a pound for meat? Everything you buy in the store is transported by truck, and that will never change. Guess what high fuel prices will do to the shipping industry? How much is your fantasy worth to you and everyone else?

Kathy Moore said...

Mr. Byrne,
I can't believe we finally agree on something! I disagree with almost everything you've ever written and then today - it's like you took the words right out of my mouth. Yes, I am an environmentalist and yes, when I hear gas prices are going up I get a huge smile on my face. It is the only way that will make people start thinking of alternatives. We have gotten used to paying pennies for our gas, when the rest of the world has been paying many dollars a gallon (I used to live in Ireland and we paid $5 a gallon 20 years ago). People are so surprised to hear me say I'm happy with the increasing prices, and then when I explain my reasoning, they pretend to agree with me. But I don't think they really do....all most people are concerned about is their wallet.

Jean said...

I took 2 semesters of Economics in college and understand how market forces could work to reform energy consumption, but as you hinted, there are many people who are financially unable to adapt as they'd like to. Government policies "that ease that pain" come too late or never, typically. People on the losing side have too little income or capital - or just fall through all the cracks in programs. E.g./FYI I have important contributions to make in residential real-estate development, incl. schematic plans for that "more livable, human-scale satellite town" you see. How can I build them when developers say 'we don't accept applications except in response to a want ad'? And while I'm unemployed or underpaid, I have to go to libraries (or a friend's house) to use the Internet, which wastes time & more. The real-estate and my self-employment work, I could do at home - if I had one of my own. My house plans have many NRG-saving components. Some are 'hidden' on my web page at about tornado protection.

CousinLymon said...

Re: anonymous: I'd like to borrow a suggestion from John Tierney of the NY Times: tax oil $1-2/gal and use the money to fund Dubya's private social security (i.e., don't cut into current benefits but as a supplement). This would help offset the drag on the economy (investments in the stock market would skyrocket).

Anonymous said...

Amen. I sickens me that even now, seeing those Hummer commercials that appeal to stroke people's egos (Oh no, someone cut in front of my child in the playground. Time to get a Hummer), run in between news stories about deaths of American soldiers and Iraqis.

Oh, wait, according to the President, everything is just fine.

Anonymous said...

There are two serious problems with "letting our oil prices soar," contained only by the forces of efficient market allocation. First, because there is no substitute energy source competitive with oil on the scale needed, free-market neo-classical economists cannot tell us how high oil prices would have to rise to bring about price-supply-demand equilibrium. If oil prices were allowed to soar in this way, low income people close to the edge would take to the streets when they found out they couldn't afford to drive to work, etc. Those of us with Land Rovers and BMWs would be afraid to drive under such a scenario. At a minimum, sustained astronomical prices at the pump would precipitate a deep recession. This recession would be global, since oil is a fungible international commodity in a global market.

Second, the higher oil prices are expected by world financial markets to soar, the greater the oil futures price and the greater the incentive for producing nations and companies to keep their (finite) reserves in the ground today, holding out for higher prices later (microeconomics, the Hotelling rule, 1931). Whether a soy bean farmer, a real estate speculator, or an oil producer, if I think my assets can command a higher price later, then I am going to hold off on selling until I believe the time has come to maximize my profit. In a free-market economy, this kind of producer behavior, of course, drives prices even higher in the short term than they otherwise would be. To illustrate the point: in retrospect, Iran and Venezuela appear foolish to have sold oil at $15 per barrel in 1998 when, if they had waited, they could command $75 or more per barrel today.

Mr Byrne and I agree that there must occur massive demand destruction. But this must not happen in a way that either (1) causes the economy to crash or (2)rewards oil producers for not pumping, thereby exacerbating the supply/price problem. I fear that rationing and price controls may be the only answer near term until alternative energy sources become available on the scale that will be required to correct the growing disequilibrium worldwide between oil supply and demand.

Anonymous said...

Dennis, your idea of letting the price of gasoline rise to the level of its actual cost is basically a good one. Anonymous is correct in commenting that there would be many adjustments to be made. Over time nearly every facet of life would change. However, you are correct in saying that this is coming whether we prepare for it or not. So, why not take the plunge, and preserve what oil is left for necessary uses other than gasoline? It is easier to adjust now than to wait until the wells run dry.

This is an issue upon which many people of all political persuasions can agree. However, I still tend to think that the government ought to mandate mpg limits on cars and car-like trucks.

One thing I wonder about: if we are paying $8 at the pump will over all gas consumption fall so far that oil companies profits fall accordingly, or will gas consumption remain high enough to create a massive windfall for those companies? Will the oil people invest in technologies that can replace oil? I guess I have a lack of faith in the movement of the hidden hand.


Stephen Schade said...

Mr. Byrne:

As an environmentalist, I agree that high gas prices are a good thing. They are being pushed toward European levels, which promote conservation, something our government never had the guts to do.

However, I believe Gov. Granholm is on to something. All Washington has given us is Cheney's "drill, drill, drill" mantra, which is not an intelligent solution. What is needed is a comprehensive energy policy that includes conservation and alternative fuels.

Anonymous said...

Back in the 70's European countries paid for a liter of gas what we now pay for a gallon. And last I knew, they did not have urban sprawl. When I was studying in Germany then, public transportation meant jumping on a tram going down the central byway.

I agree with Kathy Moore, above, and correspondent Paul Salopek that it's about time Americans got real and actually paid the true cost of the energy we use.

We Americans truly need to change our ways and to downsize.

Me said...

I am tired of getting a guilt trip for owning a minivan. I'm convinced that all those individuals that complain about minivan owners don't have more than 2 kids. Since I care about my children's safety, and I have 3 children with 2 still in car seats, my children don't fit in a regular car because they all need to be in the back seat. Our other car is an Alero and all three kids with car seats don't fit. Stop picking on suburban people that drive large cars until they make a hybrid (or something similiar) that will safely seat all five people in my family. I also can't afford to live in the city. Housing is outrageous, food is criminal, and cheap clothing stores are impossible to find (I shop at Aldi and Target/Wal-Mart because I HAVE to save money) Not everyone is a two income family! I am a stay at home mom and feel that children need a mother or father to care for them each day. Therefore we live on just my husband's salary. We have a modest/average home, with a backyard for my children to get exercise lest they become obese couch potatoes. And even in the suburbs nowadays it's not safe to walk around many times with all the crime happening. What I'm trying to say is that this issue is way more complicated than simply raising the gas prices to "make" Americans use less oil.

The Engineer said...

There are plenty of technical solutions to the oil problem. I think that we are starting to see the start of a cultural change in our approach to energy. Look at car sales, and the success that Honda and Toyota have had with their fuel efficient cars and hybrids vs. Ford and GM's truck based lineup.

Simply repeating a lot of the "solutions" to the first two energy crisis would go a long way to reducing oil consumption. People forget how the big three downsized cars from the early seventies to the late seventies. GM alone sold over 1 million diesel cars from 1978 to 1985.

Intellectuals have a hard time with the market system, because they think that, unless smart guys like themselves tell the stupid masses what to do, the stupid masses will do the wrong thing. But prices do change people's behavior. It takes time, but people will change.

Alex Colquitt said...

Gasoline Prices are already $5.72AUS ($4.32US at today's rate) per gallon here in Australia, Dennis. It hasn't done a thing to curb consumption in the cities.

As a Chicago ex-pat, I've found it hard to fathom how my fellow U.S. countrymen can still afford to run the big pickups and Hummers. Down here, a mid sized V-6 is considered a 'muscle' car these days.

I can remember buying "Gasohol" at my local gas station in Berwyn some 30 years ago. The Australian's have only 'just' embraced the concept of gasoline laced with 10% ethanol! Lobby pressure from the big oil companies kept ethanol out in the cold for years.

Downunda, they've already begun to embrace the 'satellite village' concept and many Australians are heading for the smaller rural towns. They've begun working from their homes with either cottage industries or using broadband Internet connections to do their office jobs in town. The decrease in rush hour traffic has become noticeable.

I myself have given up the automobile and rely on my motorcycle to get from point A to B. When I need to go into town, my only other transport is a Jeep, converted to LPG(Propane), which is still only a third the price of gasoline @57cents a litre.

The government of the day is blinded by the tax dollars generated at the expense of its population filling their tanks.
The real crime is the 10% Sales Tax imposed on gasoline products that already carry a 56% excise tax per litre.
The gasoline tax revenue was in the billions last year, but that's another story...

Louis Kaye said...

Gasoline prices are artificially inflated by Big Oil to induce conservation, that they happen to be raking in record billions is incidental. I'm not saying the price of oil, but the price of gas. We haven't seen any shortages all this time and even with the Alaska pipeline problem, we still won't. No rationing, no shortages, but there is plenty of expensive gasoline.

Europe has had energy star cars for years, and they have been paying over $5/gallon since God knows. But they have universal health care for everyone as the payoff.

America needs a serious attitude adjustment here. A $3 to $4 gallon tax paying for health care is better than paying it to the oil companies. The world is changing quickly, and without a plan its gonna happen on someone elses terms.

Stephen Schade said...

Gasoline prices are being pushed up primarily by demand in India and China. Wars in the Middle East and Nigeria play a secondary role. Big Oil, which has no interest in conservation, is not the culprit here. At $76 a barrel and 42 gallons per barrel, crude oil alone contributes $1.80 a gallon to the cost of gasoline. Refining, transportation, and taxes push the total above $3.00.

European countries spend their gas tax on mass transit, not health care. Doing that in this country would be a big step toward reducing energy consumption.

Louis Kaye said...

Meet the Press excerpt:
MR. RUSSERT: But you could make less profit and lower prices at the pump if you chose to.
BIG OIL: Not, not in, not in an open market. Because if, if you reduce your price in an open market, demand goes up and you, you, you run the risk of running out of, of oil and gas. So I think the issue here is not, is not price issues. The solution here is to look at how we can increase supplies.

In other words, Big Oil has taken it upon themselves to establish the price of gasoline high enough to force some level of conservation on Americans. That they are reaping huge profits at our expense is incidental. According to these profiteers, regulations imposed by the government are always bad, but prices dictated by corporatists to regulate consumption are a good thing.

Louis Kaye said...

......... almost forgot. You can only squeeze about 19.5 gallons of gas out of a barrel of oil, according to several statistical websites, just google it. So, using those statistics, Big Oil is selling cheap? I mentioned health care as a generalization only, there's other things the taxes pay depending on the country, each is different. The only thing I see are the record profits posted quarterly. Keep the faith.

The Engineer said...

>>According to these profiteers, regulations imposed by the government are always bad, but prices dictated by corporatists to regulate consumption are a good thing.

I guess that is one interpretation. The other is that the refining business has been extremely unprofitable from, say, 1986 to 2004. The return on capital over that time frame was less than if you just parked the money in a money market account at your local bank. The managers of "big oil" have all been burned on investments in their refineries. As a result, they are doing basic maintenance, upgrading emisssions controls when forced to by the EPA, and very little else. I for one don't blame them. There is no certainty that the high profits of today will be around next year.

You freedom rockers and netroots nuts can spin conspiracy theories until the end of time, but those are the facts.

Stephen Schade said...

As a chemical engineer, I realize that not all the oil is converted to gasoline. Some of it is made into heating oil and jet fuel, while part goes to petrochemicals (polyethylene, etc.). However, each barrel CONVERTED TO GASOLINE still costs $76, so crude contributes $1.80 to each gallon of gas.

Big Oil's point to Russert was that they are using part of the profit to increase supplies by finding new oil. Corporations, most of whom fight environmental laws every step of the way, have no interest in conservation.

"The engineer" has it right. Oil at $76 today is merely compensating for oil at $9 several years ago, when gas sold for less than $1 a gallon. In the long run, it all averages out.

Moreover, crude prices are determined by the worldwide marketplace, which is far larger than Big Oil. Unless we can force China and India to slow down their economies, high gas prices are here to stay.

Louis Kaye said...

Lowering the price of gasoline at the pump to decrease profits from $36 to say $15 billion to give people more of their hard earned wealth is a conspiracy theory? You justify getting gouged by Big Oil now because they weren't making much before? The managers of Big Oil have been burned....They are doing basic maintenance and emissions controls to meet EPA...... Hellooo Alaska pipeline. The engineer is right, they are merely compensating.... You guys have to better than that, come on.

Stephen Schade said...

If Big Oil really has control over the price of crude, then how come they let it slip to $9 several years ago? Why not make huge profits all the time?

The Alaska pipeline debacle is an example of how oil companies cut corners during the lean times. I would agree, however, that there is no excuse for it.

gary said...

Years ago third party candidate John Anderson had an idea for a 50 cents per gallon tax on gas to curb consumption and fund research for alternatives. I agree with Dennis that ultimately Americans won't take conservation seriously until compelled to by the price. It's also true that higher fuel prices will drive up the cost of everything else, as long as we are so dependent on non-renewable fossil fuels. I think we Americans just need to realize we can not sustain our way of living indefinitely. I got rid of my car years ago in preparation for what is happening now.