MORRIS: The Price of Gasoline is Higher Than You Think

Oil companies are among our most vocal advocates of the free enterprise system. Witness Mobil's New York Times ads and Koch's massive support of conservative think tanks like the Heritage Foundation and the Cato Institute. Yet when all is said and done the oil industry itself may be the nation's single largest recipient of welfare.I was reminded of this while watching our latest Cruise missile attack on Iraq. Everyone knows the half billion dollars or so we've expended in this latest confrontation with Saddam Hussein wasn't spent to protect democracy in the middle east nor even to protect the Kurds' human rights. It was spent to protect our access to oil. In all fairness, we should be paying the cost of these military adventures at the pump. We don't. This is just one in a number of ways that we subsidize oil.Oil receives three forms of welfare. One is through preferential tax treatment. Oil companies pay lower taxes which forces other taxpayer to pay higher taxes. The second is by giving the oil industry free protection. The Pentagon budget largely comes from income taxes. Not a penny of it comes from gas taxes. The third type of subsidy to oil comes from giving it a free ride on pollution. Higher medical bills, crop damage, cleanup costs are rarely paid for at the pump.Economists call these hidden costs "externalizes". A recent study by the Minneapolis and Washington, D.C. based Institute for Local Self-Reliance, an organization with which I am associated, put real numbers on oil's externalities. The study, Oil Slickers: How Petroleum Benefits At the Taxpayer's Expense, was done by Dr. Jenny Wahl, Associate Professor of Economics at St. Olaf College in Northfield, Minnesota. A PhD economist from the University of Chicago and one of the nation's preeminent tax analysts, Dr. Wahl was clearly qualified to tackle this issue.The study concluded that oil receives an annual subsidy of $84 billion a year. That translates into 32 cents a gallon or about $210 per year per motorist. The bottom line is that if we were paying the real costs of oil, gasoline would cost over $1.60 per gallon in Minnesota and over $2 per gallon in New York City.The biggest subsidy of all is military. Back in 1980 Jimmy Carter declared that we would go to war to protect our access to oil. In 1991 George Bush did exactly that. Today we spend about $50 billion a year to protect our access to middle eastern oil. We don't have to pay protection money to maintain access to alternative fuels like electricity or natural gas or hydrogen. We'll never have to send in Cruise missiles to force Iowa farmers to provide us with ethanol.The second biggest subsidy to oil is in environmental damages. Crop losses alone from motor vehicle pollutants may be as much as $9 billion a year. The health and environmental effects of leaking motor vehicle storage tanks could be over $1 billion a year. The ILSR study concluded that this subsidy comes to $30 billion a year.None of these costs are reflected in the pump price. The result is that we pay an artificially low price for gasoline. That encourages driving and pollution. And it discourages alternatives like mass transit or efficient vehicles or alternative fuels, many of which would be more competitive if oil had to pay its true costs.What should be done? One strategy would be to restructure our tax system. Shift the costs of oil from the general taxpayer to the motorist. Raise taxes on gasoline while lowering other taxes by an equivalent amount. A proposal that would have done just that was debated last year in the Minnesota legislature. On the national level, Congress should ask motorists to pay their fair share of the Pentagon budget while reducing taxes on income, the current source of most of our military funding, by an equivalent amount.A second strategy would be for policy makers to take the real costs of oil into account when they design programs to encourage alternatives. Subsidies to mass transit or alternative fuels tend to be visible and thus tend to be more politically vulnerable. Subsidies to oil are hidden. Yet the latter dwarfs the former. For example, federal and state tax subsidies to ethanol total about $900 million. Tax subsidies for gasoline are $3.8 billion. Yet ethanol incentives are under vigorous attack in Congress while incentives for oil have been increased!Forcing oil to pay its real costs is a very conservative notion. Market economies work best when they rely on accurate prices. But the price we pay at the pump woefully understates the cost of protecting, extracting, delivering and burning oil. We should and can remedy that. Motorists and oil companies no longer should be given a free ride at the general taxpayer's expense.

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