America Over a Barrel
$100-a-barrel oil is back. And unless Americans make the difficult but necessary adjustments they've put off for years, things could get a whole lot worse.
Last month, oil prices topped $100 a barrel, setting alarm bells ringing in Western capitals still reeling from the last economic recession. We have been here before, of course: In 2008, oil prices started below $90 per barrel, spiked above $140 by midyear, and plummeted below $33 only six months later -- signaling both the economic bubble and its collapse. But unlike three years ago, the current rise in prices is not driven by surging oil demand and shrinking spare production capacity. Instead, widespread anxiety over unpredictable consequences of political upheaval in the Arab world reveals again the fragility of the global supply system for the one essential commodity of modern life.
Last month, oil prices topped $100 a barrel, setting alarm bells ringing in Western capitals still reeling from the last economic recession. We have been here before, of course: In 2008, oil prices started below $90 per barrel, spiked above $140 by midyear, and plummeted below $33 only six months later — signaling both the economic bubble and its collapse. But unlike three years ago, the current rise in prices is not driven by surging oil demand and shrinking spare production capacity. Instead, widespread anxiety over unpredictable consequences of political upheaval in the Arab world reveals again the fragility of the global supply system for the one essential commodity of modern life.
The United States should not need an international crisis to be alert to this critical vulnerability. In 2005, Hurricanes Katrina and Rita hit the Gulf Coast where U.S. oil and gas production and refineries are concentrated, causing major supply disruptions. Last year’s Deepwater Horizon oil spill underscored the risks undertaken to explore in deeper waters and remoter areas under ever harsher operating conditions in order to satisfy America’s thirst for oil. Yet that massive spill — 200 million gallons of crude in all — represented only six hours of U.S. daily petroleum consumption.
Nor were these the first alarms. The twin oil shocks of the 1970s awakened Washington to the United States’ supply vulnerabilities, enough so that the government lifted its controls on oil and natural gas prices, leading to higher domestic production and greater energy-efficiency gains. Higher gasoline prices at the pump and introduction of Corporate Average Fuel Economy (CAFE) standards in 1975 led to a 30 percent improvement in the fuel efficiency of American passenger cars.
By the 1990s, however, lower world oil prices — resulting from increased production from non-OPEC countries and higher exports from the former Soviet Union — brought with them complacency over America’s profligate oil consumption. The average fuel economy of cars sold in the United States actually peaked in model year 1987; CAFE standards have been left essentially unchanged since 1990, and automobile fuel-efficiency gains have been accordingly absent. This is decidedly not because automobile manufacturers failed to make technological advances — rather, technical improvements went toward satisfying consumer desire for larger, heavier, and faster cars, not to enhance fuel economy. Sales of light trucks and sport utility vehicles surpassed those of passenger cars in recent years.
As a result, the United States — with 4.5 percent of world population — now consumes more than 40 percent of the global supply of gasoline. U.S. oil production, meanwhile, peaked in 1970, and the country became the world’s leading importer of oil — to the tune of more than $300 billion in 2010.
This is a manifestly unsustainable situation. Every U.S. president since Richard Nixon has called for "energy independence," but America’s reliance on imported oil has mainly worsened — along with a growing concern about fossil fuels’ contribution to global warming. Yet the country is no closer to sustained policies for tackling either its oil import vulnerability or its carbon footprint.
U.S. politicians love to talk about energy policy, but they rarely deliver. The main reason is that the American energy system is so vast that it takes decades, not years, to shift it in any fundamental way. The car fleet, power plants, buildings, machinery, equipment, and manufacturing processes all take many years to turn over, even with the right market signals and policies. The scale of the problem is mind-boggling: President Barack Obama’s promise in January’s State of the Union address to put 1 million electric vehicles on American roads by 2015 may sound impressive at first — until you consider that it would amount to less than half a percent of the more than 250 million vehicles currently registered in the United States. And where will the electricity to power even more electric vehicles come from? These are not the sort of challenges that can be easily resolved in an election cycle or two — which explains why empty slogans such as "energy independence," "drill, baby, drill," and "green jobs" substitute for well-formulated long-term policy.
What would a serious public debate about energy — a real discussion of the hard choices Americans face — look like? To concentrate on the most important challenges, it would focus on the transportation and power sectors — vehicles and electricity — which together represent 72 percent of U.S. carbon emissions.
Two-thirds of the oil used in the United States goes toward transportation, and two-thirds of that in turn is gasoline used in passenger cars. At the same time, America is a major producer and exporter of coal. It has replaced Russia as the largest producer of natural gas thanks to the shale gas revolution of recent years. Consequently, it no longer imports major volumes of natural gas, except from Canada, and is not expected to do so in the foreseeable future. Nuclear power and hydroelectricity contribute major shares in power generation.
So, America’s problem is not lack of energy independence — it’s oil import dependence, stemming almost entirely from individual transportation choices. If the cars on American roads had the fuel efficiency of those on European or Japanese roads, oil import dependence would virtually disappear.
How could this happen? Higher fuel economy mandates are a good start, but insufficient. In 2007, the U.S. government set a goal of 35 miles per gallon by 2020, but that is still below the averages achieved in other advanced economies using conventional technology. So there’s no need to wait for a breakthrough in either motor fuel or engine technology to greatly improve automobile fuel economy.
What the United States does need, however, is an appropriate price signal. Every major oil importer among advanced economies imposes a high transportation fuels tax in order to reflect the true societal cost of importing oil and to generate revenue — except America, where the federal motor fuels taxes of 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel have not changed since 1993. State governments have been similarly skittish about increasing taxes on fuel, meaning that, taking inflation into account, combined U.S. taxes at the pump have effectively declined over time.
Gasoline taxes in Europe, meanwhile, are 10 times higher than combined U.S. federal and average state taxes. Is it any wonder European consumers demand more efficient cars? Nevertheless, even modest increases in the federal gasoline tax, as proposed by recent national commissions on transportation and debt reduction, have been unpopular — never mind that, in theory, every 10-cent increase in the federal gasoline tax could generate $14 billion in annual revenue. (Of course, as the tax rate increases, gasoline consumption should decrease, as intended, and each subsequent tax increase would generate smaller revenue. When pump prices rose above $4 per gallon in the summer of 2008, Americans responded by driving less and buying more fuel-efficient vehicles.)
As prices jump at the pump this spring and summer, Americans can reflect on this stark choice: They can either tax themselves to moderate their overly indulgent consumption of motor fuels and invest the revenue in urgent needs for the United States, or they can watch gasoline prices go up as supply tightens and the extra income goes to oil producers. Either way, prices are going up.
What about climate change? As it happens, the transportation sector also represents 32 percent of carbon dioxide emissions in the United States, second only to the power sector’s 40 percent contribution. Therefore, any reduction in the consumption of motor fuels would also have a significant positive impact on reducing greenhouse gas emissions.
Above all, sound energy policy must begin with a long, hard look in the mirror. The problem is not caused by Chinese, Indians, or other people from emerging economies using more oil, but at a fraction of the rate consumed by Americans. Nor does it have to do with importing oil from "people who hate us." Oil is a globally traded commodity, and any upset in the world supply system affects the United States. Upheaval in Libya, for instance, has already hit Americans’ wallets, even though the country sends only 3 percent of its oil to the United States.
We cannot wait for a breakthrough in battery technology or second-generation biofuels to solve the problem sometime in the future. A robust transportation fuels tax can make an immediate down payment on reducing U.S. oil import dependence, while providing greater incentive for alternative fuels to prove themselves economically without the sort of perpetual subsidies that ethanol, for instance, has been granted. A significant hike in the federal tax — say, $1 per gallon on gasoline, with increases staggered over five years — would also be a powerful tool in the United States’ fight to cut its massive fiscal and balance-of-payment deficits.
A tax of this magnitude would be painful and politically controversial. But as 2012 approaches, American candidates for political office will have to judge whether energy security and climate change policy are important enough to discuss seriously or whether voters will be satisfied by more empty rhetoric. Some might even suggest that debating such critical issues is one of the functions of a presidential campaign. If a serious discussion does not take place this time, then the alarm bell of $100 oil is truly broken. Two hundred dollars, anyone?
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