An Improbable Cure for Oil Addiction

Philip H. Gordon
Philip H. Gordon Former Brookings Expert, Mary and David Boies Senior Fellow in U.S. Foreign Policy - Council on Foreign Relations

May 12, 2006

With public anger rising at gas prices that now exceed $3 per gallon, American politicians are predictably rushing forward with proposals designed to show that they are “doing something” about the problem.

Democrats are investigating oil companies and proposing a 60-day suspension of the federal gas tax while Republicans are clamouring to start drilling in the Arctic National Wildlife Reserve, having withdrawn their initial proposal for a $100 “holiday rebate” in the face of public ridicule.

These measures may make some politicians feel good but they will provide little relief to consumers. Their only impact on what President George W. Bush called America’s “addiction to oil” would be to subsidise it.

Instead of supporting politically cynical palliatives, Mr Bush should take the opportunity created by high oil prices to ask Congress to impose a “price floor” on a barrel of oil. The mechanism would be very simple. The government would announce that, as part of a comprehensive energy strategy, it will henceforth not allow the price of oil to fall below a particular floor of, say, $60 per barrel. If high oil prices continue, the proposal would have little impact and cost nothing, either politically or financially.

But if prices fall below that level – as they might well do once the impact of recent prices on demand and investment in alternative energy sources work their way through the world economy – the government would intervene to keep the price stable, with the difference between the floor and the market price reverting to the state as revenue.

If consumers and industry knew that the price of a barrel of oil would never again fall below $60 per barrel – the level around which US-produced corn-based ethanol fuel becomes economically viable – they could make long-term investment and consumption decisions in a way that makes little economic sense so long as price stability is not guaranteed. Americans will not take long-term decisions to buy fuel-efficient automobiles, create distribution networks for alternative fuels, or invest in technologies like hydrogen fuel cells, flex-fuel vehicles or wind power unless they know that a future sharp fall in oil prices will not undercut them.

To make the proposal even more palatable politically, Washington could promise to spend the money on education, healthcare, homeland security and even tax cuts rather than use if for deficit reduction, a noble purpose but one that rarely excites voters. Senator Richard Lugar, an influential leader in the energy policy debate, has already come out in favour of a modest, revenue-neutral oil price floor.

It is difficult to overstate the costs of relying so extensively on expensive, imported oil, not only for the obvious economic and environmental reasons. It also imposes serious constraints on our foreign policies. With oil near $70 per barrel, we have little leverage on Russia as it erodes democracy at home, bullies its neighbours and drags its feet on nuclear non-proliferation. Iran feels emboldened to defy the international community and continue its suspected nuclear weapons programme, human rights abuses and support for terrorists. China protects energy producers such as Sudan, standing in the way of United Nations Security Council action, while Venezuela uses its oil revenues to pursue an arms buildup and promote anti-American movements in Latin America.

Perversely, our oil dependence is not only bad for us, it is bad for the oil exporters themselves. Countless studies have shown the relationship between rentier economies that live off a single natural resource export and the tendency toward undemocratic rule. It is not a coincidence that many of the world’s big oil exporters – Saudi Arabia, Iran, Iraq, Russia, Nigeria, Venezuela – are authoritarian regimes or worse.

Perhaps most importantly, our failure to move decisively away from a dependence on oil and the subsequent high oil prices that failure produces means that we are funding both sides in the war on terror. Many of the extra dollars we spend on energy goes to countries such as Saudi Arabia, which funds the Madrassas that teach extremist Islam in Pakistan, and Iran, which finances Hezbollah. Even friendly Qatar is giving $50m out of the oil revenues it received from us to Hamas.

An oil price floor can not alone deal with our oil addiction and unless other measures to curb consumption and promote alternatives are adopted it might never even come into effect. But direct taxes on oil and gasoline are politically difficult and most of the current proposals for dealing with the crisis are marginal or counterproductive. In the longer run only by knowing that the need for an alternative to oil is permanent will Americans change their habits. If Mr Bush really wants to go down in history as a president who changed the country in positive ways, weaning Americans off oil should be at the top of his agenda.