Why a gas tax is good for you
Twenty months ago, when plenty of folks were reeling at $48-per-barrel oil, energy economist Philip Verleger predicted that the price was headed for $60. A prolific author, Verleger served in the Treasury Department under President Carter. Verleger, who now runs a consulting business out of Aspen, Colo., and is a visiting fellow with the Institute for International Economics, explains why more pain could be ahead at the pump.
Are the politicians wrong when they accuse the industry of market manipulation?
People on Capitol Hill always say, "Big Oil," and I think they're referring to the Exxons. And they're wrong, but they may be on to something in terms of the big suppliers of gasoline. The big integrated companies have been very careful over the years about playing by the rules. It's not so clear that the people who now dominate the manufacture of gasoline, or refining, in the United States are as careful.
Last summer . . . after the energy bill passed, Valero [the nation's No. 1 refiner] announced it was going to quit using MTBE [a clean-air additive that has caused water pollution problems]. The press release almost begged the refiners it competes with to join in cutting gasoline outputs [because volume would fall with the sudden removal of MTBE]. I said at the time that could raise gasoline prices by 80 cents or $1 a gallon, and that's what we're talking about now.
You focus on mundane topics like refining rather than the big debate over whether world oil supply has peaked. Why?
Peak oil is an interesting abstract subject. But neither you nor I will find out if we are peaking in our lifetime. My focus is on how prices get determined. And peak oil has nothing to do with it. What's pulling the price up is gasoline. It's the [Environmental Protection Agency]. It's the [Federal Trade Commission]. And Detroit.
If Intel comes up with a new faster chip, they work hand in glove with Microsoft and Dell so that the whole thing works seamlessly. That's been the great innovation. If the computer industry had developed the way the auto industry and the oil industry developed together, you'd still be using a typewriter.
They're fighting. There's a battle over who bears the cost of clean fuels that started in the late 1960s and continues today. The auto industry, through the [EPA], has forced the oil industry to bear the burden of spending the money to make the low-sulfur fuels. So the [refining] industry has met the specifications, but they didn't expand capacity. And the auto industry didn't pay any attention, and they kept making these cars that need to use more gasoline. So it's an absence of coordination that's gotten us here.
You criticize the way the FTC has handled past oil industry mergers, forcing the big companies to spin off refineries to smaller companies that did not expand capacity. What did the agency do wrong?
What the FTC should have done is get an agreement in these mergers to expand refining capacity. Instead, the FTC has a one-size-fits-all merger policy. They say there's going to be too much concentration, you've got to divest. And this has created more problems for the economy than you can shake a stick at. The American consumer would be much better off if the FTC were shut down.
You've written about the risk of recession due to energy prices. How do you answer those who say our economy is safer today than in the 1970s because we're more efficient and less oil intensive?
We are more efficient. But it doesn't really get it right. The Japanese economy was much more efficient in 1973 than the U.S. economy, and yet the impact on the Japanese economy was much larger than the impact on the U.S. economy. Intensity doesn't tell you about impact.
But the quarter after the hurricanes, we still had economic growth. Even that price spike did not appear to dampen the economy.
The [Federal Reserve] did not raise interest rates. They accommodated, and that's important. Because they believe inflation is under control, they've done nothing to rein in the rise of prices. Because we've had deregulation and globalization—it's very hard now for companies to raise prices because of competitors—the central bankers didn't have to do anything. They could relax. Now they watch it closely. But they haven't done anything.
I have some concerns. When do we finally see the end of this period of seeing the benefits of globalization and deregulation? We keep having these risks. One was that Delta Airlines would close. Well, if Delta Airlines closes, then air fares are going to double. And then you begin to start an inflationary cycle. [Or] if the Chinese suddenly raise prices because of the high cost of shipping, you could have a problem. At that point, oil does matter.
President Bush is going to stop adding crude oil to the Strategic Petroleum Reserve—what impact will that have?
Since we don't have any refining capacity now, none. The tanks are full. This is like offering somebody who just had a seven-course fancy meal a prime-rib dinner. It doesn't do any good.
How about the waivers of environmental regulations he proposes?
We could knock a dollar a gallon off the retail price of gasoline if we did a couple of things on environmental rules. My environmental friends look at me and say, "Phil, why are you saying this?"
I propose a trade-off. Bush has called for construction of new refineries. It takes years to build a refinery. It takes one year to build an ethanol plant. Let's move toward ethanol more rapidly. We'll suffer the cost of higher pollution this year, and then next year, we're going to insist that people use more ethanol. . . . Insist all gasoline has to have 10 percent ethanol.
You frequently advocate a gasoline tax, while acknowledging it's a political nonstarter. What good would it do?
First—global warming. We're burning too much. I think everybody but George Bush and Dick Cheney understands the problem. You have to find a way to force people to use less. Second, were we to adopt a gasoline tax of say $2 or $3 a gallon, offset by a reduction in Social Security [payroll taxes] and some other things to minimize the effects [on working Americans], our consumption would be significantly lower. World oil prices would be significantly lower. And the income that's flowing to [Iranian President] Mahmoud Ahmadinejad, [Russian President] Vladimir Putin, [Venezuelan President] Hugo Chavez, and a lot of the other people we don't like would be drastically reduced. Right now, we're paying twice—first for the oil that flows into the hands of our enemies, and then we pay the cost of fighting a war in Iraq. It's important for the nation as a whole to do something like this.