Fueling the Future
Good news abounds as we head into the warmest season of the year. "Despite hopes for a less expensive summer, it looks like Americans are stuck paying above-average gas prices," AAA spokesman Michael Green tells USA Today. Gas prices are as high as they've been since 2008.
Wait. That's the good news?
Well, maybe not if you're planning a trip to Grandma's house. But it's good news that the price of gasoline floats up and down, because that's a reminder that in the U.S., gas prices are set mostly by the law of supply and demand. Taxes make up a chunk of the price as well, of course, but at least gasoline is somewhat subject to market forces.
The alternative, when the government holds down consumer costs by subsidizing fuel, is very bad news indeed. As I explained here in March, extensive energy subsidies -- like those found in countries from Venezuela to Iran -- drain government coffers and encourage people to use far more fuel than they really need.
There’s another positive step in the U.S. The Commerce Department will reportedly allow two companies to begin exporting a form of unrefined oil. Eventually, our government should stop meddling and allow exports of any type of fuel, whether crude or refined. Maybe even to Brazil and Indonesia -- two other countries that extensively subsidize fuel. (Probably not to Iran.)
How did we get to a place where oil exports are a huge issue? Again, it’s a market success story. Just a few years ago, it looked as if the U.S. would be an oil importer forever. In 2005, the country imported 60 percent of the oil it used. But last year we needed to import just 40 percent.
The reason is a boom in domestic production thanks to hydraulic fracturing -- fracking. States such as Texas and North Dakota are now awash in domestic energy. Meanwhile, in a (somewhat perverse) victory for federalism, states including New York and California remain on the sidelines, simply because they won't allow fracking.
Also, as the price of gas increased, so did exploration for new sources. That's why fracking was developed: To get at oil that geologists knew was there, but that firms couldn't affordably get out of the ground. Time magazine reports that total spending by oil (and natural gas) companies "grew 11 percent on average per year from 2000-2012, and spending on development activities increased by 5 percent ($18 billion) in 2013." Of course it did. As gas prices increased, so did efforts to produce more of it.
Of course, there's plenty of federal intervention in fuel markets, too. Far too much. Federal policy mandates that refiners include 10 percent ethanol in their fuel. That results in about two-fifths of our nation's corn crop being burned each year instead of being available as food for people and livestock. Plus, ethanol damages small engines -- that's why your lawnmower and leaf blower wear out much more quickly than they used to. Federal tax policy also foolishly favors ethanol.
The United States led the way in the development of gasoline, because we had plenty of oil and because we allowed free markets to work. The rest of the world is catching on: fuel subsidies are a bad idea. We ought to lead the way in revoking mandates and tax credits as well if we want to guarantee plentiful, affordable fuel supplies.
Rich Tucker is a writer living in northern Virginia. You can e-mail him at firstname.lastname@example.org.