Local View: Some inconvenient choices

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By THOMAS S. ZORN

With oil prices at record highs, a lot of alternative policies are being advocated. Unfortunately there are no painless, risk-free alternatives. The Lincoln Journal Star (June 25) noted that at $4 a gallon people are changing their driving habits. It is not surprising that people are conserving when previously voluntary calls for conservation didn’t work.  

The reality is that people typically won’t economize on their use of gasoline if it is relatively cheap. The trouble with voluntary conservation is that cutbacks by some make using oil cheaper for others. When oil is cheap it encourages uses such as private planes, personal watercraft, off-road vehicles and thousands of industrial uses.   

Some people believe we can have cheap energy and reduce greenhouse gases by switching to biofuels and wind turbines. Both of these receive heavy subsidies and can provide only a tiny percentage of our current energy consumption. Others want to see mandatory restrictions placed on energy consumption. Even if that works, the problem is that if we unilaterally take measures to curtail oil consumption it will largely be offset by increased consumption by developing economies. Many of them currently not only do not tax gasoline, they actually subsidize it. The irony is that these countries often use old technologies that emit far more greenhouse gases than is true in Western countries.

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The current high price of oil, however, will curtail consumption worldwide, if for no other reason than that it’s likely to produce a worldwide economic slowdown. Not only will people and governments be forced to economize, there will eventually be substitution toward other sources of energy. A high price of oil will stimulate the development of substitutes without requiring subsidies; only research and experimental projects should receive subsidies.

In the energy crisis of the 1970s people were initially convinced that it was impossible for them to reduce their consumption of energy. They did!  They started buying smaller cars and more efficient appliances. There was also a supply response. At huge costs, oil companies started extracting oil from places like the North Atlantic. The price eventually dropped below $10 per barrel in the subsequent oil glut. I anticipate that once again the price of oil will eventually drop from current levels because of both supply and demand adjustments. This won’t happen any time soon, nor are we likely ever to return to the cheap oil of the ’90s.

What should we do now? I am in favor of anything that will moderate energy prices in the short run. The relatively high price of oil and its substitutes is producing real hardship for many people here and will lead to deprivation and even starvation in other parts of the world. It is simply very difficult to quickly adapt to a sudden rise in energy prices.  For example, while people are slowing down on the interstate they still rush around in traffic. An independent test showed that people could save as much as 37 percent by driving less aggressively. Nothing eats gas like rapid acceleration. But it takes time for people to become educated. In the short run, people won’t drive their gas-guzzling SUVs off a cliff; given time most will buy more economical cars.

If we want energy independence, the optimal policy is to eventually move toward taxing imported oil. If we want to reduce greenhouse gases, then we should tax the fuels that produce it. Politicians and pundits are all over the place; they mostly condemned the gas tax holiday because it would just cause people to drive more. But Congress overwhelmingly voted to stop filling the strategic fuel reserve to help reduce prices. Congress investigates big oil and commodity traders but votes against measures such as offshore drilling that would increase supply. Congress is enthusiastic about ethanol but restricts the importation of cheap ethanol from Brazil.

Congress recently tried to pass “Cap and Trade,” which sets caps on CO2 but allows firms to trade for the right to pollute. Cap and Trade is a more efficient way to reduce greenhouse gases than just caps. Europe has pioneered the system. As Newsweek sarcastically reported, “Consumer prices were up, energy company profits were up, and carbon emissions were up.” Because both candidates support this policy, it is very likely to pass in the next Congress.

“Cap and Trade” and most other proposals for energy savings and CO2 reduction are actually indirect forms of taxation. These include car mileage and emissions standards and subsidies to biofuels and wind energy. It is much more efficient to tax oil directly. This would be highly unpopular; it is understandable, therefore, why politicians prefer policies that involve indirect taxes. In reality there are no costless choices.

Dr. Thomas S. Zorn is the George B. Cook/Ameritas Professor of Finance in the College of Business Administration at the University of Nebraska-Lincoln.