The Gas Crisis May Be About to Get a Whole Lot Worse

The Progress Report. Posted May 2, 2008.

Rising gas prices are hitting Americans hard, while oil companies rake in record profits. As the economy falters, calls to deal with the price of gasoline have reached the halls of Washington, D.C. "[L]awmakers are considering ideas they might have nixed months ago, including temporarily lifting the federal gas tax and halting deposits of oil into the Strategic Petroleum Reserve." Sens. John McCain (R-AZ) and Hillary Clinton (D-NY) have called for a summer moratorium on the federal gas tax. McCain has not specified how to make up the $11 billion; Clinton has proposed a tax on windfall profits from oil companies to recoup losses to the federal highway fund. Economic analysts of all stripes have responded with horror, pointing out that "the benefits will flow to oil companies, not consumers." Even if a suspension of the gas tax led to lower prices, the rich would benefit the most, since "the more a family earns, the more they drive," notes Sam Davis of the Center for American Progress. Len Burman of the non-partisan Urban Institute calls the proposal "a huge windfall for refiners." New York Times columnist Tom Friedman argues, "This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks." Newsweek's Jonathan Alter agrees, stating, "Suspending the federal gas tax is a crass ploy for votes." The Atlantic Monthly's James Fallows calls cutting the gas tax "destructive nuttiness" and "embarrassing." Economist Gilbert Metcalf called it "very short-sighted," noting, "If we want people to invest in energy-saving cars, we need some assurance that the higher price paid for these cars is going to pay off through fuel savings."

What's to blame for high gas prices

President Bush said Tuesday that he has no "magic wand" to affect gas prices. But as Steve Hargreaves of CNN Money writes, gas price is "all about government policy." Since the United States has some of the lowest gas taxes in the world, the price at the pump is dominated by the cost of oil. In congressional testimony one month ago, Exxon Mobil senior vice president Stephen Simon said his company believes the price of oil involves four components. The effects of supply and demand accounts for "somewhere around $50-55 a barrel," or about half the current price. The second factor is the weaker dollar; since 2001, "the dollar has lost 45% of its value" against the euro. The third is "geopolitical risk"; since 2003, the United States has been committed to a three-trillion-dollar war in Iraq, the heart of the turbulent oil-producing world. And the final component is "speculation"; investors have "looked to commodities not only as a hedge against inflation but as a hedge against the tumbling greenback."

Immediate action

When asked by Reuters abot the gas tax proposal, conservative economist Greg Mankiw recommended, "If you want to provide households tax relief, a direct rebate ... is more effective." Center for American Progress analysts Sam Davis and Daniel J. Weiss describe how a fast-acting "reliefbate" plan would work. Applied progressively, the "reliefbate" would provide reprieve to 80 percent of American households as well as all independent truckers, at a total cost of $23.2 billion, which "could easily be paid for by closing several oil tax loopholes and recovering lost royalties." The Washington Post's Dan Froomkin further recognizes that there are "two hugely significant factors" that Bush could take action on immediately: "the war in Iraq and the value of the dollar."

Long-term solutions

The fundamental solution to gas prices is to reduce dependence on oil. As conservative economist Douglas Holtz-Eakin said, "You have to price oil on a permanent basis to provide incentives to shift away from it. It's the key issue -- and the hardest one to make progress on." This year, the National Surface Transportation Policy and Revenue Study Commission submitted a comprehensive plan for the future of the transportation infrastructure, which fuel taxes fund. But the federal fuel tax is but one brushstroke in a much broader picture. The Center for American Progress's Energy Opportunity Agenda states, "The realities of global warming and our growing dependence on oil, much of it imported, will make energy more pivotal than ever to our economic, environmental, and national security fortunes in the 21st century. The challenge we face is nothing short of the conversion of an economy sustained by high-carbon energy -- putting both our national security and the health of our planet at serious risk -- to one based on low-carbon, sustainable sources of energy. The scale of this undertaking is immense and its potential enormous."

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