Sunday, September 11, 2005

Why Cheap Gas Is a Bad Habit
Higher pump prices would help push Americans away from gas guzzlers.

By Robert J. Samuelson
Sept. 19, 2005 issue - What this country needs is $4-a-gallon gasoline or, maybe, $5. We don't need it today, but we do need it over the next seven to 10 years via a steadily rising oil tax. Coupled with stricter fuel-economy standards, higher pump prices would push reluctant auto companies and American drivers away from today's gas guzzlers. That should be our policy. The deafening silence you hear on this crucial subject from the White House, Congress and the media is a sorry indicator of national shortsightedness.

Katrina's message is clear: we are vulnerable to any major cutoff of oil. This cutoff came from a natural disaster, but the larger menace is a political cutoff. Two thirds of the world's proven oil reserves lie around the Persian Gulf; these countries, led by Saudi Arabia, now provide about a quarter of today's oil supply. This flow could be interrupted at any time for many reasons—terrorism, war, domestic upheaval, deliberate cuts. Many other oil exporters are similarly unreliable: Russia (the No. 2 exporter), Venezuela (No. 5) or Nigeria (No. 8).

Until oil's geography changes, a prudent society would respond to this unavoidable insecurity. After the first oil "crisis" in 1973, Americans did. Congress created a Strategic Petroleum Reserve (SPR) and mandated fuel-economy standards. Drivers were sobered by high prices. From 1970 to 1990, average fuel economy for cars rose from 13.5 miles per gallon (mpg) to 20mpg. For "light trucks" (a category covering pickups, SUVs and minivans), the gains were from 10mpg to 16mpg. But in the 1990s, there was massive backsliding. Fuel economy stagnated, as millions of Americans shifted to SUVs and pickups. The SPR languished. In 1992, it had oil equal to 83 days of imports; by 2000, that was only 52 days.

Complacency reigned. Americans re-embraced the notion of cheap gasoline as a "right" that, if impaired, must be blamed on greedy oil companies, monopolistic OPEC or some sinister conspiracy. Thus, "gouging" was last week's acceptable explanation for the sharp run-up of gasoline prices. Forget the law of supply and demand. Forget our continuing vulnerabilities.

More than 60 percent of our oil use goes for transportation, dominated by road travel. It's a myth that encouraging more fuel-efficient vehicles means that we will all have to drive shoeboxes. The advent of "hybrid" vehicles—combining internal-combustion engines and electric motors—promises fuel-efficiency gains of 10 percent to 50 percent based on existing technologies, says David Greene of the Oak Ridge National Laboratory. But it's also a myth that simply issuing tougher fuel standards will bring instant relief.

"It's going to take a long time," says Walter McManus of the University of Michigan Transportation Research Institute. "You've got 225 million vehicles out there. It's about 15 years to turn over the fleet." Actually, the math is worse than that. From 2003 to 2025, the number of vehicles may grow by 50 percent, projects the Energy Information Administration. The increase reflects more people (from today's 297 million to 351 million in 2025) and higher incomes. The upshot: to keep total gasoline consumption constant, average fuel efficiency must improve roughly 50 percent.

We should be able to do this. Car companies can shift decisively toward hybrids. Despite the hype, annual hybrid sales this year will amount to a mere 234,000 out of total sales of about 17 million, McManus says; and present production plans would raise that to only about 600,000 by 2009, he projects. But if companies are to be shoved toward hybrids, they have to be assured of strong demand, because there's a definite downside. On average, hybrids cost $3,000 to $4,000 more than conventional cars, says Greene. (The reasons: the cost of batteries and the need for two power systems.) The traditional U.S. car companies—General Motors, Ford and Chrysler—are unfortunately the least prepared for change. They tied their fortunes to the biggest SUVs and pickups.

Hence, the need for a stiff oil tax. Government needs to foster a market for fuel efficiency. The tax should be introduced gradually—paralleling tougher fuel standards— and, perhaps, tempered if global oil prices rise sharply. One way or another, Americans should know that the era of cheap gasoline is history. Some drivers will want hybrid versions of their present vehicles; others will downsize. It's not a national tragedy for someone to trade an Expedition for a Taurus.

At times, individual freedom must be compromised to improve collective security. Even with this approach, we would not insulate ourselves from all upsets in the world oil market, including a catastrophic loss of supply. Barring huge oil discoveries or technological breakthroughs, "energy independence" is another myth. But we could limit our exposure. The fact that we're not trying is—considering how warnings of New Orleans's vulnerability were ignored—an irony worth noting.

© 2005 Newsweek, Inc.