The Democrats are at it again. Pandering to the masses, that is. A key component of their current campaign strategy is to rail against high gas prices while also pummeling the oil companies and those sneaky Arabs. Part of their campaign does have a valid point, though. Why should be subsidize the oil companies when gas prices are sky high and they are making record profits? While Exxon is paying its retired CEO 400 million dollars in retirement benefits, we are paying near record prices for oil and gas.

The response by the Republicans, on the other hand, is pathetic. Republicans say they have spent years advocating policies that would reduce reliance on imported oil, largely by promoting more domestic energy production. This might be a good defense except for the fact that no amount of domestic production will make a dent in our oil imports.

Despite the fact that gas prices are much higher this year than they were last year, demand for gas in this country continues to increase and is at an all time high. I shudder to think what would happen if gas prices actually decreased. The Japanese, on the other hand, decreased their consumption of gas this year for the first time in decades.

While there are some aspects of the Democrats’ campaign that are positive, the main message seems to be that our first priority is to do something to bring down gas prices. This message is being offered in concert with a contradictory message that we need to conserve energy and develop alternative fuels.

My question is, if demand is increasing despite increases in gas prices, how much will be consume if the Democrats can magically bring down prices? The desired result shouldn’t be to bring down prices, but to bring down consumption. Bringing down consumption is good in itself, because it helps our planet, not because it brings down prices.

The hard truth is that we need to maintain high prices, not try to figure out ways to reduce them. The American people need to know that these prices will remain high and will get higher. As long as people perceive these high prices as a temporary phenomenon that can be magically attenuated by politics, beating up on the oil companies, or more drilling, they won’t take the necessary actions to ensure a long term commitment to conservation.

One approach is to impose a hefty gas tax. Although I would support that, I would propose an approach that takes on the level of consumption directly.

Determine the average number of gallons consumed per household and issue an electronic card to each household that allows it to consume the average number of gallons less 10%. Each year increase the reduction from the baseline by an additional 5% until we get to a 50% reduction. Establish a market much like the oil market whereby each household can trade portions of its quota at a price determined by the market. Those who conserve by cutting back on driving, moving closer to work, or buying a more efficient car could directly profit from their frugality. Those who chose to consume above their allotment would have to pay a price over and above the retail price of gasoline. Those without cars, which include a lot of the poor, could pick up some additional spending money.

Would this be fair? Well, is the current system fair? Under the current system, the rich get to consume as much as they want without any significant impact on their standard of living. As gas prices increase, the poor and the near poor will be unable to get around and the middle class may be significantly impacted. Under my system, actual gasoline prices will probably decrease with decreased consumption. However, unlike the current system, conservation will not be its own undoing. If we conserve under the current system, this also tends to drive down prices, which just encourages us to be profligate again, perpetuating the hopeless cycle.

Why won’t a system like this be implemented? It won’t be implemented because it would actually do something to decrease overall consumption. It is much easier for politicians to just rail against the oil companies without actually requiring any action or sacrifice on the part of their constituents.

Under the current crop of politicians, we will continue to stumble our way into the future, with a subsidy here, a credit there, and a congressional hearing over there. We will not set real goals that are attainable. To do so would require the recognition that we are actually running out of oil and we have met the enemy and he is us.

Are there better proposals out there? Probably. But regardless, almost anything is better than a situation where gas prices increase while consumption decreases at the same time. We need to recognize and overcome the inelasticity of demand for gas that seems to permeate our society.

Posted by Tom Street at April 22, 2006 11:14 AM

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