Crisis presents opportunity to get serious about oil

THE BALTIMORE SUN

Today's mounting oil crisis provides a terrific opportunity for effective, market-based solutions. Sadly, the public and congressional leaders have had so many good reasons to mistrust the oil and automotive companies that it seems likely we will once again blow the opportunity.

Simply put, a big tax on oil would raise money for our impoverished national treasury and reduce consumption of a scarce resource, thus providing substantial benefits to the environment and our national security. It also would remove the need to legislate fuel-efficiency standards for automakers and, depending on its design, provide a needed boost to the domestic oil industry.

Although I'm not keen on exempting domestically produced petroleum (and Texas oilmen) from such a tax, a tax only on imported oil would allow the profitable development of U.S. oil requiring more expensive production methods. It also would establish a floor for energy prices, supporting development of solar energy and other alternative fuels.

Of course, the previous thoughts have been true for the past 17 years, following the 1973 Arab oil embargo. We got a strategic oil reserve out of the crisis. And we got a flurry of attention to synthetic fuels, including several billion dollars in public money. Those projects didn't go very far once world energy prices began falling later in the 1970s.

Congress did impose mileage standards on domestic carmakers, but the auto companies, and the public, moved away from them as quickly as their pocketbooks would allow. In other words, energy-conservation laws and cheap oil don't mix.

The marketplace still works more quickly and effectively in influencing individual economic decisions than do government rules. And U.S. energy prices have remained relatively cheap in the years following the oil embargo.

Compared with most other industrialized nations, we have continued to pay only a third to a half as much for petroleum products. Prices here are even reasonable when measured against our own record of cheap domestic energy.

I fondly recall filling it up for 29.9 cents a gallon "not so long ago." Now, I simply fork over a $20 bill and wonder if I'll get any change back. However, "not so long ago" was, in fact, more like 20 years ago. Adjusted for inflation, today's prices aren't terribly higher by comparison.

Faced with cheap energy, consumers have done what comes naturally. As a result, our record of energy conservation doesn't look particularly good when compared with those of other industrial countries. And our increasing reliance on imported energy is even more lamentable. Would we have troops massed in Saudi Arabia today if we were much less dependent on foreign oil? Maybe, but there's little doubt that U.S. foreign policy would be structured differently.

Although there has been concern about rising energy prices since Iraq invaded Kuwait, the only real energy crisis ever faced by the United States has involved supply, not prices. And the current outpouring of concern is really not so much a new story as yet another chapter in a saga that began early this century.

That's when oceans of oil were discovered in the Middle East, first in Iran and later in Saudi Arabia and other lands that ring the Persian Gulf. This oil has always been a mixed blessing for the United States.If it were not for these immense pools of Mideast oil, I'd be comfortable allowing the free market to largely determine U.S. energy policy. On price and security grounds, however, we need a federal role in energy pricing.

As we found out during the 1970s, the presence of cheap Mideast oil prevents U.S. energy companies from pursuing more expensive, alternative energy strategies. Such strategies require government price guarantees.

Likewise, access to relatively cheap foreign oil leaves the U.S. vulnerable to any politically induced decisions to halt the flow of oil. This, of course, is precisely what happened to us during the 1980s, when we "unlearned" the valuable lessons pounded into us during the 1973-74 embargo.

The best way for the federal government to be involved in energy is NOT in telling us or Detroit how much to use but in making sure energy prices reflect the full "cost" of our energy supplies.

These days, that cost certainly includes protecting us from excessive dependence on foreign suppliers. So, energy prices should be set high enough to encourage conservation, increased exploration and production of domestic fuels, and the development of alternative forms of energy.

(Speaking of the cost of "protection," how about the $1.25 billion or so the U.S. military must spend each month on operation Desert Shield? About a quarter of the 8 million barrels of oil imported each day by the U.S. has been coming from the gulf. So, to guarantee that 2 million barrels of supply, we're spending about $40 million a day.

(That comes to $20 a barrel -- substantially more than the run-up in crude oil prices caused by the gulf crisis. So, when you complain about what you're spending at the pump, think about what your government is spending. It really helps to put the dependence issue in sharp economic terms, while also explaining why Uncle Sam has been begging all his buddies to help pay the defense bill.)

While we're at it, it's absolutely vital that market prices for oil also reflect the environmental cost of any increased domestic energy production. Here is where we need a much stronger government role, given the traditional failure of marketplace economics to adequately deal with "third-party" impacts of energy production and consumption, including air and water pollution.

If Congress does not like the impact of an oil tax on heating-oil customers, it could either restrict the tax to gasoline, enact compensatory tax-relief provisions or pass some combination of these approaches.

One of the strongest points of opposition to an oil tax is that it would send an already weak economy into a serious recession. That's ironic, given that it's precisely our vulnerability to reduced supplies from Iraq and Kuwait that is being cited as a major contributor to the economy's current weakness.

But even granting the validity ofthe economic argument, it's hardly cast in stone that an oil tax has to be levied all at once. A gradual approach is far preferable under most circumstances. This would allow a tax to be phased in over five or 10 years, giving businesses and consumers the time to adjust to a new system of energy pricing.

The point is that very workable approaches exist for an effective and fair oil tax. Even without the revenue implications, an oil tax is good national policy. And, as congressional budget leaders know all too well, we badly need the extra revenues these days.

Although most of our attention is riveted on the Mideast these days, let's also say a prayer for the congressional leaders faced with trying to deal with a numbing array of budget crises. An oil tax would certainly not be an easy way out of these problems, but it would be a way out.

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