Analysis & Opinions - San Francisco Chronicle

Old Oil Fears Don't Match 2007 Reality: U.S. Vulnerability, Economic Threat are Largely Overstated

| July 15, 2007

Congress is debating action to address the nation's dependence on foreign oil. This would seem to be good news. Not necessarily.

While tightening requirements on fuel efficiency is a good idea, many other envisioned policies aimed at "energy independence" fix a problem that no longer exists, while moving in the wrong direction with regard to today's actual energy challenges — particularly those related to climate change. Rather than staying the course with energy priorities of the past, congressional leaders should declare independence from oil fears and craft an energy policy relevant to the 21st century.

Let's start with the problem that the policies are intended to fix. Do you believe that the United States is dangerously vulnerable to oil supply disruptions? Then, ask yourself: "When was the last time I saw clear evidence of this vulnerability?" If you're like most Americans, you'll think back to the Arab oil embargo of 1973, with its long gas lines and associated recession. There are three problems with using 1973 as a point of reference in our current energy debates:

— First, the long gas lines in 1973 were caused by price controls imposed by President Richard Nixon in 1971, not embargoes of oil imposed by Arabs two years later. Without price controls, we would have had higher prices at the pump when supplies were reduced, not long lines. Unpleasant, but not as memorable.

— Second, many studies of the era — including a landmark 1997 paper co-authored by current Federal Reserve Chairman Ben Bernanke — have found that monetary policy had more to do with the recessions of the '70s than did oil price shocks.

— Third, 2007 is not 1973. Evidence less than a quarter-century old indicates that years of warnings about the nation's troubling vulnerability to oil price shocks have turned out to be seriously overstated. Consider the most obvious fact: From 2002 through 2006, the price of oil nearly tripled. And what were the observable macroeconomic impacts? What crippling effects did this unprecedented price run-up produce?

None. U.S. economic growth continued apace — despite a war in Iraq, the devastation to oil-infrastructure wrought by hurricanes Katrina and Rita, and 17 straight interest rate increases by the Fed. Oil alarmists routinely fail to note that the majority of the oil imported by the United States comes from reliably friendly suppliers, with our hemispheric neighbors Canada and Mexico topping the list. Furthermore, even perceived adversaries have for the past two decades proved to be dependable producers.

Since 1982, oil supplies from Islamic fundamentalist Iran have grown as steadily as Norway's or Canada's. This should come as no surprise, because the Middle East's oil exporting economies are far more dependent on us (importers) than we are on them. For both Saudi Arabia and Iran, oil revenues comprise about 90 percent of export earnings, 70 percent of government receipts, and more 40 percent of gross domestic product.

Even with today's record high gas prices, the average American consumer still spends only about 3.5 percent of income on gasoline — a number that has changed little during the past half century. No wonder that it is only now, after five years of price increases, the growth in miles driven by U.S. motorists is reportedly starting to level off.

Of course, the impacts of high gasoline prices are unevenly felt. Most vulnerable are low- and middle-income households in rural areas. (The same households also contribute far more than their share of the troops sent to protect U.S. interests in the Middle East and elsewhere.) On the other side of the equation, stockholders and executives in U.S. energy companies gain substantially when oil prices go up.

But while the nation, as a whole, is not threatened by higher gas prices, it is threatened by oil-alarmism. Exaggerated claims about the adverse impacts of oil price shocks on consumers and the economy have for decades helped justify an unnecessarily assertive, and costly, military posture in the Middle East and elsewhere. They have provided a rationale for billions spent on lease breaks for the oil industry. And now they provide motivation for a new round of ill-considered subsidies, including support for climate-hostile technologies to convert coal to oil, and a dramatic increase in the production of corn-based ethanol of questionable benefit to citizens of the United States, and harmful to citizens elsewhere.

We should be particularly wary of any claims that the public interest will be served by a drop in oil and gasoline prices. One argument is that today's still relatively elevated oil price levels represent a threat to U.S. national security not because they directly affect the economy, but because they increase the clout of undemocratic, menacing regimes. In failing to reduce our dependence on imported oil, we are said to be "funding both sides in the war on terror." This argument is backward.

Low oil and gasoline prices will no more solve our myriad energy challenges than lower potato chip prices will put an end to obesity. Indeed, if climate change is the primary energy-related concern of our time, we have every reason to welcome record gasoline prices. The benefit of sustained high prices at the pump, measured in terms of induced behavioral changes and investments in conservation and the development of low-carbon fuel alternatives, are likely to far outweigh the indirect effect of further enriching potentially (or actually) adversarial oil exporters.

Of course, nothing would be more beneficial to the nation than if our elected officials were suddenly to find long-absent courage and impose a serious gas tax, now potentially reframed as a carbon tax, driving a wedge between the price consumers pay at the pump and the revenue that goes to producers. This would put money in the U.S. Treasury now, rather than sending it overseas later. Policy-makers are capable of designing a gasoline tax that would put U.S. prices in line with those paid by consumers in the world's other wealthy countries, at the same time protecting those among us most vulnerable to such a policy change. Until now, they have just been unwilling to do so.

A significant increase in the gas tax can work because we are not, in fact, a nation of addicts, as President Bush famously suggested in his 2006 State of the Union address. We are a nation of consumers with far more potential for adaptability than is usually acknowledged. We are a nation of innovators, whose creative efforts to address the real energy challenges of the 21st century are effectively mobilized when nonrenewable energy prices are reliably high, not when they are unpredictable or low. And we are a nation of citizens, ready to respond to leaders with long-term vision, if given the opportunity.

Philip E. Auerswald is assistant professor and director of the Center for Science and Technology Policy at the School of Public Policy, George Mason University, and a research associate at the Belfer Center for Science and International Affairs at Harvard University's Kennedy School of Government. He is a founding co-editor of Innovations: Technology | Governance | Globalization.

For more information on this publication: Belfer Communications Office
For Academic Citation: Auerswald, Philip E..“Old Oil Fears Don't Match 2007 Reality: U.S. Vulnerability, Economic Threat are Largely Overstated.” San Francisco Chronicle, July 15, 2007.

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