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A sure cure for oil addiction
Americans guzzle gas faster than anyone else in the world. But there's a cure: paying full price, for both the direct and indirect costs of oil. Why not a significant gas tax?
By Roger Ibbotson
In President Bushs State of the Union address earlier this year, he talked about Americas addiction to oil. The United States accounts for a little more than 4% of the world population but consumes about a quarter of its oil. Even by developed-nation standards, we consume a disproportionate amount of energy. The U.S. has around the same size population as Western Europe, but it uses twice the oil.
Western European and Japanese leaders have successfully reduced oil consumption in their countries, while the U.S. has continued to guzzle.
The reason the Europeans and Japanese have been successful where we have failed is that they realized you dont cure an addiction to oil by subsidizing it. You cure an addiction to oil by making people pay full price -- both the direct and indirect costs.
No brakes on consumption
Back in 1973, following the Yom Kippur War fought by Israel against Egypt and Syria, the Organization of Arab Petroleum Exporting Companies refused to ship petroleum to countries that supported Israel in the war, namely the United States, Western Europe and Japan. By 1974, oil prices had tripled, sparking a major worldwide economic recession.
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In the following years, countries looked for solutions to their energy reliance. Japan and Western Europe enacted high taxes to curb oil use, while the United States reacted by imposing fuel-economy standards. Since the mid-70s, oil consumption in Japan and Western Europe has remained flat. U.S. consumption has more than doubled, according to the Energy Information Administration.
The United States imported approximately $251.6 billion worth of oil last year -- a significant portion of our trade deficit. And more than half of that oil goes to gasoline for cars. The fuel-efficiency standards enacted after the oil crisis didnt work to curb oil consumption in the U.S., partially due to population growth, but largely due to the changing mix of vehicle sales.
Politicians wanting to support American car manufacturers proposed far less strict fuel-economy standards for trucks. Today, approximately half of all vehicles sold in the United States are categorized as trucks -- the category includes SUVs and minivans -- and do not have to comply with the same standards as cars.
Demand for trucks has continued to grow in this country because gasoline is relatively cheap. It is roughly half of what Western Europeans pay. Besides buying gas-guzzling trucks, Americans have adapted their lives to inexpensive gasoline in other ways -- the number of people who carpool has dropped over the years, while average commute times have increased.
Americans think cheap gas is their right. Every time gas prices rise, there's a national outcry -- as we can see going on right now. Americans are pointing their fingers at big oil companies, OPEC and government taxation. But in fact, gasoline taxes have actually declined over time, while the amount we're paying in indirect costs for gasoline has increased.
Gunpoint subsidies
The U.S. government uses a large portion of its expenditures to build stable, friendly governments in countries where we have an economic interest -- in particular countries that supply us with a reliable source of oil. But these military costs are not reflected in the price of the oil we consume. Instead, theyre paid for by non-oil taxes. This, in effect, creates a price subsidy for oil.
The U.S. government has been spending approximately $100 billion a year on the Iraq conflict. This expenditure is approaching $1,000 per American citizen since the war began. And not only does much of that money flow out of the U.S. economy, but revenue from our oil imports goes to prop up regimes that suppress their people and sponsor terrorism. Since Americans are already paying high indirect costs for gasoline (funding wars with their non-oil tax dollars), why shouldn't we keep that revenue in our own country by enacting a meaningful gasoline tax?
Paying the true price
A significant gasoline tax would let the U.S. cut down the twin trade and budget deficits, and the tax would let the U.S. stop funding unfriendly, repressive countries. It would benefit the environment. And it doesnt have to hurt. The tax could be phased in slowly over time to allow Americans, technology and industry to adjust. Also, gas-and-oil expenditures are actually a small percentage of both GDP and personal consumption. Done slowly and carefully, the economy should be able to absorb this tax.
Theres a cost to our inaction. Our current-account deficit cannot grow forever. Over time, foreign central banks will become increasingly reluctant to keep financing our debt, especially given the sizeable trade deficit. That will cause even more depreciation of the U.S. dollar and a rise in interest rates.
But theres one good argument against a high gasoline tax. It will hurt the poor more than the rich because gasoline consumption accounts for a larger proportion of their income. And this is true. But gas prices are going to rise dramatically over time regardless of this tax. Worldwide demand for oil will only increase as China and India emerge as economic powers. By enacting a gas tax now and using the revenue to pay down the debt and cut away at the trade deficit, the benefits to the economy will help everyone.
If you believe that some of the military action we've taken (particularly in recent years) has been at least partially, if not primarily, to secure our supply of oil, then it is a cost of the commodity and should be factored into the price. We can change bad behavior -- buying gas-guzzling cars, forgoing public transportation and not adopting alternative energy -- by simply making people pay the true cost of gasoline, both direct and indirect costs.
Roger Ibbotson, Ph.D., is founder of Ibbotson Associates, a Morningstar company, and a professor of finance at the Yale School of Management.
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