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October 01, 2005

John Tierney: Instead of the Soft Path, Try Hard Cash.

John Tierney’s column today "Instead of the Soft Path, Try Hard Cash" is right on the button. The solution to gas usage in the US is to raise the price. Forget CAFE (which is what has led to SUVs), and simply tack another 50 cents or whatever on to a gallon of gas. In fact, now is a really great time to do it. As the various supply shocks (Katrina and Rita refineries causing refineries to close and so on) fade away instead of allowing gas prices to fall from their current $3.00 a gallon or so, simply state that gas taxes will rise. Curb the deficit (Democrats would like that) and start to solve the US gas hunger.

President Bush has been getting grief for telling
people to cut back on driving while he gas-guzzles his
way across the country. But he's merely expressing
Washington's bipartisan consensus: energy conservation
is a wonderful idea -- for other people.

In the past, Republicans weren't quite as devoted to
conservation as Democrats were, especially ones like
John Kerry. During last year's campaign he called for
massive cutbacks in energy use as he traveled among
his five houses on a Gulfstream that was less
fuel-efficient per passenger than Air Force One.

But Republicans shuttling between just two homes have
generally at least paid lip service to energy
conservation, because they know most voters like it in
principle. The problem is that these voters, for some
odd reason, cling to the notion that their personal
travels are just as essential as politicians'.

So both parties refuse to consider the best way to
save energy: charging more for gasoline. It's taboo to
raise the gas tax, or even to raise prices during a
shortage.

The gas stations that increased prices after Hurricane
Katrina were having precisely the effect that Bush
wanted when he tried to discourage driving. But he
lumped them with street criminals, saying there should
be ''zero tolerance of people breaking the law during
an emergency such as this, whether it be looting, or
price-gouging at the gasoline pump.''

To assuage voters, politicians hide the price tag when
they try to impose conservation. They've forced cars
and appliances to become more energy-efficient, which
makes them more expensive, but no one blames Congress
for the higher sticker prices.

The rationale for these policies is that consumers
will save money in the long run by using less energy
-- they're just not savvy enough to realize it when
they're shopping for a new car or refrigerator. But
even if you doubt consumers' judgment, it doesn't
follow that regulators are any more savvy when they
dictate what should be sold.

The efficiency standards for appliances, far from
paying for themselves, will cost consumers roughly $50
billion through 2050, according to Ronald Sutherland,
an economist at George Mason University. And those
costs are borne disproportionately by low-income and
middle-income households.

Besides being costly, conservation rules produce
unintended consequences. The fuel-efficiency standards
for cars led to that environmentalist nightmare, the
S.U.V., which became popular because of a loophole in
the rules.

Consumers who wanted a big car had to buy one
pretending to be a truck because carmakers were forced
to downsize their fleets. As cars became lighter, they
also became more dangerous, resulting in an additional
2,000 deaths per year, according to the National
Research Council.

During the last three decades, regulators in
California and other states forced utilities to
subsidize alternative energy sources and technologies
that reduced electricity consumption. That was the
energy ''soft path,'' as its advocates described it in
rhapsodies like the ones I heard at Robert Redford's
place at Sundance in 1989.

At Redford's conference, devoted to ''healing the
planet,'' utility and coal-company executives listened
to lectures from the soft-path advocates explaining
why the energy soft path would more than pay for
itself. The executives listened politely, but one of
them summed up their reaction with the punch line from
the old story about a failed dog-food marketing
campaign. ''The dogs ain't eatin' it,'' he said.

The utility executives didn't think these conservation
measures made economic sense -- and they turned out to
be right, as evidenced by later research and the
soaring electricity prices in California to cover the
soft-path boondoggles forced on the utilities. Those
mistakes haven't deterred today's energy
conservationists from coming up with more money-saving
schemes for society, but there's usually a good reason
the dogs ain't eatin' it already.

Individuals don't always make the best choices about
energy use -- you can make a case that we drive too
much because the price of gasoline doesn't reflect all
the social costs. But if a new gas tax covered those
costs, then we'd have all the incentive we need to
conserve energy. While a gas tax may sound politically
hopeless, it's worth considering (in another column)
ways to induce both parties to go for it.

A tax would make people figure out on their own how to
burn less gasoline. Washington wouldn't need to
lecture them on conservation or dictate what kind of
cars they can buy. Freed from supervisory duties, some
politicians might even think about conserving energy
themselves.

The essential and vital part is that first sentence of the last paragraph. Let people work out how to do it themselves. As I said some time ago, substitution is what it’s all about.

Let's start by assuming that shortages are inevitable, that oil really will go up to, say, $ 100 a barrel and stay there. What will happen ? There will be substitution. At least three different types of it. We'll leave aside all the extra exploration that will come from such high prices, the new technologies that will be created to extract more from the same field ( you know that the majority of oil in a field is never recovered ? ) and all those sorts of things. We'll just address that concept of substitution in the manner in which an economist should. And we'll limit ourselves to transport, for as Quiggin notes, that's the one area where we don't appear to have an alternative straight out of the box.
1) We'll extract oil substitutes from other sources. From the Athabasca tar sands for example. Profitable at today's prices, at $ 100 a barrel this is a no brainer. According to the US Geological Survey there's half a millenium's worth of oil up there for the whole planet. Or ethanol, or bio diesel. No great change in society, infrastructure or technology. We might even follow the example of some enterprising residents of South Wales : running their cars off waste frying oil. Yes, it works, what do you think bio diesel is ?
2) We'll substitute other technologies for powering transport. Things like fuel cells ( today's obligatory scandium reference, yes, I do at the day job, The Low Hanging Fruit Company, provide scandium for solid oxide fuel cells ) running on hydrogen, which could be extracted from water via nuclear power stations. That may not be the best way to do it, or even the best technology, but at some price between $ 40 and $1,000 a barrel, one of these alternatives is going to make it into the mass market.
3) It's axiomatic ( meaning, blindingly obvious to the initiates) that everything is substituitable. We are not restricted to thinking about " what can I put in my car other than oil ? " or "what power source makes oil irrelevant for cars ?". We also have " How will people change their behaviour if transport is expensive ? " Can we make a decent stab at estimating this ? Is there any method or example to help us ?
Oddly ( you just know what the answer is here don't you ? ), yes.
In the UK, petrol prices are currently $ 7.30 per gallon ( if I've done the UK : US gallon thing right ) and at similar levels elsewhere in Europe. Tax rates of course. That is way higher than what $ 100 a barrel crude would bring to the US. Has civilisation fallen over ? With the exception of France, which arguably hasn't had any since the end of the Angevin Empire, no. People drive smaller cars, with smaller engines. Those engines tend to have higher efficiencies than US engines of the same size ( mostly to do with US mandated pollution controls. One might point out that increased air pollution would be a substitute for oil. ). People tend to live closer to their work, and so commute less. There is less zoning in cities, allowing urban residents to dispense with a car for the daily round of shopping, drinking and eating. There is more use of mass transport, less suburban sprawl and so on and so on.
All of these are substitutions for oil.
So Krugman is correct : What we will have to do is adapt. And that adaptation won't be that horrible, it'll just mean the US getting a little more like parts of Europe in one respect. No, civilisation won't collapse, we won't all become cheese eating surrender monkeys, won't have to sign over our guns nor give up free speech. It'll just be the normal rules of economics, a market system allowing individuals to substitute one set of goods for another in response to changing relative prices.
So, Paul, why didn't you tell your readers what will happen, instead of your doom laden pronouncements? I mean, you used to be a pretty good economist, certainly up there in the list of likely Nobel nominees. What happened ?

And yes, I’m aware of the joy in using a critique of one NYT columnist to add to the words of another.

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October 1, 2005 in Your Tax Money at Work | Permalink

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Comments

Nice column but I hope that:

the soaring electricity prices in California to cover the soft-path boondoggles forced on the utilities

doesn't refer to 2001, when there were certainly other factors in play.

Posted by: Matt Weiner | Oct 6, 2005 2:13:49 PM