TCS Daily


Here's Some Good That Pols Can Do

By James K. Glassman - September 12, 2005 12:00 AM

A week ago, Hurricane Katrina, a Category 4 storm, shoved the waters of the Gulf of Mexico up into shallow Lake Pontchartrain to the north of New Orleans, then dumped the lake into the bowl of the city, causing destruction and death. When I lived in New Orleans, this "hundred-year storm" was a continual worry. Now it is terrible reality.

It seems almost crass to bring up economic issues at a time like this, but Katrina has triggered a mindless hysteria over energy prices that must be addressed. What are the facts?

The Gulf Coast is home to one-half of America's refining capacity and one-fourth of crude oil and one-fifth of natural gas production. It's also the entry point for three-fifths of our petroleum imports. An attitude of not-in-my-backyard has restricted such activities elsewhere in the nation, forcing too many eggs into one regional basket.

Before the hurricane, oil prices had already doubled over 20 months (for reasons I will get to). But, remarkably, last Friday, the fifth day after the storm, a barrel was $67.57, up only a dollar from the previous week. Gasoline prices, however, quickly soared more than 50 cents, exceeding $3 a gallon, mainly because of the damage to refineries and pipelines. We live hand-to-mouth. Any disruption in oil supply sends prices up sharply.

But, as Tornsten Fischer of Economy.com writes, "The recent spikes in gasoline, distillate and jet fuel prices should be short-lived." I agree.

One reason is that energy companies have made exceptional efforts to get production back on line. Another is that President Bush took precisely the right steps in the wake of the hurricane. He waived the environmental requirements that force refineries to make different blends for different regions, and he opened up the Strategic Petroleum Reserve, our rainy-day supply. Also, while he warned against "price-gouging," he made no effort to place an artificial cap on gasoline prices. If he had, he would have discouraged producers from rushing new supply to market. The result would have been nationwide shortages and long gas lines.

"Our experience shows price controls all backfire," says Gregg Easterbrook of the Brookings Institution.

Still, many politicians, evidently ignorant of the simple laws of supply and demand, are trying to put a government-enforced lid on prices. The attorney general of Illinois, for example, issued "emergency rules" that forbid "an unconscionably high price" -- whatever that means. The secretary of state in Massachusetts is proposing a moratorium on natural gas price increases. Hawaii is enforcing a price cap for wholesale gasoline.

For such compassionate pols, I have an idea that will actually cut prices without causing shortages: suspend fuel taxes. In Honolulu, federal, state and local taxes on gasoline amount to 53 cents a gallon at the pump. Illinois has among the highest gas-tax rates in the country, along with California and New York. On average, U.S. drivers pay 25 cents a gallon in state levies alone.

But more important, it's time for us to recognize the hard truth about energy prices. They have risen because, on the one hand, the developing world, especially India and China, is rapidly increasing its economic growth (a good thing for us all) and needs fuel to run factories, heat homes and power vehicles and, on the other, environmental and political constraints -- on drilling and mining and on building refineries and ports -- have limited supplies.

Demand for energy globally will rise 1.7 percent a year through 2030, according to "The Outlook for Energy," a widely respected ExxonMobil report, chock full of facts. Alternative sources, like wind and solar, will remain a tiny, though growing, factor. The key to success over the next generation is new technology to make more efficient use of fossil fuels, like hybrid cars, modernized coal-fired plants and improved methods for finding and drilling for oil and gas.

Also essential is that government get out of the way of production and keep markets free. The global appetite for energy isn't evil or embarrassing. It's a manifestation of rising standards of living.

What is truly amazing is the relative equanimity with which the United States has endured a quick doubling of oil prices plus a calamity in its prime energy region. Markets adjust and, so ultimately, will the glorious city of New Orleans -- though the human cost of this tragedy can never be calculated.

To see more of the extensive coverage of Hurricane Katrina from TCS, click here.

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