Tax policy is energy policy

Study after study in many different nations and economies has shown, for example, that the best way to avoid having to scramble for new supply sources of oil is to control the growth of demand, if not outright to reduce absolute demand.

In other words, it is not about 'imports from the Middle East,' as referenced in the president's State of the Union speech. It is all about aggregate demand for a depleting product. So is it possible to reduce aggregate demand? The short answer is yes - and I do not mean by using a totalitarian or authoritarian approach.

Consider Japan, a postwar industrial powerhouse, and now a respected parliamentary democracy that today uses less oil than it did in 1974. That is, after 32 years of economic growth (OK, including a severe recession in the late 1980s and 1990s), Japan is using less oil now than before, in an absolute sense.

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So the case of Japan demonstrates that reducing absolute oil demand is possible over time. How does Japan do it? The short answer is with high fuel taxes and an emphasis at many levels on producing energy-efficient devices, particularly fuel-efficient cars (products that Japan then exports and sells in America, among other places).

Higher taxes on fuel at the gas pump in America would begin to do some of the trick of arresting growth in oil usage.

But so far, politics in the United States have ruled out higher gasoline taxes even during the 'cheap oil' days of the 1980s and 1990s.

I have heard intelligent people, including not a few politicians who are in a position to know better, describe it along the lines of 'cheap gas is an American birthright.' (To which I have a two-word response: 'Peak Oil.')

So lacking a long-term approach to conserving a depleting asset, the default energy policy of the United States seems to be that the nation will buy and import a lot of oil from other nations, rather than pay high gas taxes.

This low-tax, high-demand situation in America sharply contrasts the energy situation in most other advanced economies on the world, particularly Europe and Japan (see above), where fuel taxes are hefty to say the least.

With low fuel taxes in the United States and high fuel taxes in Europe and Japan, it follows that the average fuel efficiency in the U.S. automobile fleet is somewhat less than half that of the automobile fleet in Europe. And the US fuel-efficiency average is far less than half the average fuel efficiency of the Japanese automobile fleet.

This particular statistic concerning the comparative national average for fuel efficiency matters a lot when a nation uses as much gasoline every day as does America. Current U.S. daily gasoline demand is around 9.2 million barrels per day (it varies seasonally).

If the U.S. automobile fleet were just as efficient as the European fleet (a very big 'if,' but work with me on this), that usage number would be about 4.6 million barrels of gasoline per day.

But still, it is possible that increased fuel-efficiency alone could 'save' half of the gasoline used in the United States every day. And consider that it takes two barrels of oil, on average, to refine into one barrel of gasoline.

So 'saving' 4.6 million barrels of gasoline per day is the equivalent of daily reducing crude oil usage by 9.2 million barrels, in a world that produces and consumes about 84 million barrels of oil per day. So what you might want to label as 'excessive' U.S. gasoline demand alone, based simply on considerations of low mileage, accounts for as much as 11% of the total daily world oil demand, or an amount equal to the anticipated daily oil demand of China in 2010 (US Department of Energy estimate).

The economic and policy arguments do not stop there, however. Low automotive fuel efficiency in America directly leads to higher levels of oil imports, higher demand, higher posted prices, and far more U.S. dollars sent overseas to pay for oil.

In the aggregate, then, the United States is spending hundreds of billions of dollars overseas, and in essence 'decapitalizing' itself, so that many millions of drivers can sit in their cars and idle in traffic jams every day. Can you really say that this is the 'free market' at work? What would Clausewitz say? I think he would call it bad policy and abysmal energy strategy.

This abysmal oil situation is so bad that it must be a reflection of an inherent flaw in the political and policymaking process. The current situation is so self-destructive to the nation over the long term, and such obviously bad policy, that it could not otherwise occur if the nation were, let's say, at war.

(Oh, wait a minute. We are at war. Last I heard, it was going to be a 'long war,' according to the Quadrennial Defense Review.) Think about it. Any general who proposed a warfighting strategy equivalent to the current so-called 'energy strategy' to political leaders would lose his stars and be ushered off to retirement in the Old Soldiers' Home.

Yet the policymakers in America move ahead as if by instinct, like moths to a flame, in an attempt to perpetuate a lost past receding before our eyes. (Well, OK, I admit that you have to understand how to view depletion at a global level. This is not for amateurs.)

And people in general wonder why they are less and less in control of their energy destiny, and bellyache that the nation is more and more at the mercy of the whims of other people in faroff places. The answer is as close as the driveway of the large house in the leafy suburb, many miles from the homeowner's place of employment, which is a state of affairs due in large measure part to a legacy of low fuel prices, if not low fuel taxes.

By Byron W King for Whiskey and Gunpowder

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