Again this summer we seem to be headed for high gas prices. And this means we are getting the usual confusion about the causes of and solutions to this painful reality.
Some would have us believe that greedy oil companies and energy speculators are driving up prices. This ignores a couple of key facts.
First, U.S. oil companies control a very small percentage of world oil reserves, about 6 percent. Their greed is not enough to shape the world oil market. Regarding oil speculation driving up prices, Warren Meyer of Forbes.com writes, In fact, it is almost impossible to find examples of private action sustaining an artificially high price floor.
This makes talk of increased taxes on energy production unfortunate. Congress and President Barack Obama are discussing getting rid of certain tax benefits for energy producers that have been in place since the tax code's inception. These tax benefits help energy companies offset the enormous costs of new energy exploration. Increasing the cost of finding new energy reserves will actually drive fuel prices higher.
The Obama administration remains opposed to exploring new sources of domestic oil.
Energy Secretary Steven Chu, before joining the administration, said that increasing fuel prices to European levels should be American policy. So it isn't hard to see why Obama's team opposes the most obvious way to lower price: namely increasing supply. Instead it favors higher taxes on and greater regulation of fossil fuels. Both these policies will increase the cost of energy, including gas.
Another driver of high fuel prices is the loose monetary policy of the Federal Reserve. In order to stimulate the economy, the Fed has kept interest rates extremely low. This has had the effect of lowering the value of the dollar, the world currency for oil. Because our dollar's value is diminishing, it takes more and more of those dollars to buy the same barrel of oil. That hits us at the pump. We could ask the Fed to tighten its monetary policy, but that likely would cause short-term economic slowdown.
In fact, there is almost no policy the government can pursue that will make a significant dent in fuel prices. We cannot legislate an end to political unrest in the Middle East. We cannot control worldwide demand for oil, which is again on the rise. Even increased domestic oil production will only modestly lower prices. That doesn't mean it shouldn't be pursued, but we shouldn't expect much.
In South Dakota, we like to point to ethanol and wind power as solutions. Let's not kid ourselves. These industries are inefficient, both economically and in energy production (to say nothing of the environmental impact of plowing under native prairie land and decreasing wildlife habitat). Their dependence on government subsidies would make the greediest oil baron blush. In addition, the simple physics of these energy sources dictate that they will never meet anything but a small percentage of our energy needs.
Have we gotten used to the idea that the government's job is to solve our every problem? Maybe the best course is the one we least want to follow: get used to spending more on energy or adjusting our lifestyles to use less of it.
Jon D. Schaff is professor of political science at Northern State University in Aberdeen. The views presented here are the author's own and do not represent those of Northern State University.