Washington has hundreds of pending bills dealing with energy, and it's difficult to predict which ones will move in a Congress under pressure to do something about $3-a-gallon gas before the November elections (even though average prices have recently fallen by nearly 20 percent from that mark). Unfortunately, most of these proposals are anti-market and pro-big government and therefore likely to do more harm than good.
Here's a rundown of the worst of the worst:
1. Oil Rationing -- Politicians routinely complain about $3 gas and then offer up "solutions" likely to raise the cost to $4 or even $5. One such idea is to cap the amount of oil Americans can use. The provisions vary, but most would require the nation to sharply reduce petroleum consumption over the next decade. Proponents claim that a tough limit on oil use will lead to the development of petroleum alternatives -- kind of like banning the use of pharmaceuticals in the hope that herbal remedies will make big strides.
In reality, by instituting a quota we would be doing to ourselves what the al Qaeda terrorists who have attempted to blow up Saudi oil facilities want to do to us -- reduce the quantity and raise the price of oil to unprecedented levels. The only realistic chance rationing has for reducing the price of oil is if this misguided policy sparks a big recession -- a very real possibility.
2. Alternative Energy Mandates -- The flipside of mandating less oil use is mandating more alternatives to oil, and proposals to do so are included in several bills. Of course, replacing oil would be great, if it is with something better that outcompetes it, but not with something that's so bad that the feds must force it on the public. The sponsors of alternative energy mandates always miss this rather obvious point.
Last year's energy bill contained the first such mandate, requiring that 4 billion gallons of corn-based ethanol be added to the nation's gasoline in 2006. Thus far, it has been a disaster. Ethanol costs considerably more than gasoline (If it cost less, it would have been in wider use long before the government required it.) In fact, the mandate is the second biggest reason, behind rising oil prices, that this year has been so painful at the pump. Nonetheless, several bills seek to double or even triple the current ethanol requirements.
Beyond corn, many other agricultural products, ranging from rice husks to grasses to soybeans, are also being considered as materials for making ethanol or diesel fuel. Most of these are even costlier than corn ethanol, and the bills requiring their use will benefit the agriculture sector at the expense of the driving public. Indeed, the misuse of energy concerns as an excuse to pile on more agricultural pork is a common theme among many of these proposed alternative fuel mandates.
3. Windfall Profits And Other Taxes -- If one were to pick an issue and an administration that exemplified Washington at its most inept, energy policy under the Carter administration would be a very good choice. Yet many Carter-era energy ideas are being resurrected. The windfall profits tax is perhaps the worst. It's a tax levied on oil producers when the price exceeds some predetermined level. A pending proposal would impose a 50 percent tax on the price of oil above $40 per barrel. This tax would be levied on top of the 35 percent federal corporate income tax and other taxes imposed on the industry.
When last tried by Carter in 1980, the windfall profits tax proved counterproductive, discouraging domestic oil production while increasing imports from OPEC and other foreign suppliers not subject to the tax. According to a 1990 Congressional Research Service study, the windfall profits tax "reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent." Reagan repealed it in 1988, but now it may make a comeback.
Various other tax hike proposals are nearly as misguided. Though there is populist appeal in raising taxes on big oil at a time when everyone seems to hate them, doing so would do nothing to lower the price at the pump. The price of oil and gasoline is set by market factors, not corporate tax rates. And over the long term, higher taxes would serve to constrain supplies by discouraging investments needed for expansions. We want an oil industry that produces more, not less, in the years ahead, and punitive tax hikes most definitely won't get us there.
4. Price Controls and Price Gouging Laws -- As with the windfall profits tax, these measures likely will make matters worse.
The idea behind price controls is simple enough -- the federal government sets a price for gasoline that is below the market price. But price controls have never worked. Washington can't repeal the law of supply and demand, and any attempt to do so will only cause harm. The market price of gasoline is the price where supply and demand come into balance. Right now that price is high, but that is the market reality. Trying to force the price down below this level means that demand will outstrip supply at the mandated price. That's why price controls in the 1970s invariably caused shortages -- gas lines, rationing and stations running out. Most Americans would prefer that gas be available at the market price than unavailable at a lower price.
More likely to become law than price controls are proposed restrictions on so-called price gouging. These measures feed off consumer anger over high gas prices and suspicion that oil industry misconduct is somehow to blame. But existing antitrust laws already forbid any company from engaging in monopolistic practices or colluding with competitors to suppress supplies and raise prices. A recent Federal Trade Commission investigation into recent gasoline price increases found no evidence of industry violations, concluding that "the evidence collected in this investigation indicated that firms behaved competitively." However, new price gouging bills would vastly expand the definition of illegal conduct, effectively making any price increase, no matter how well justified by market factors, a potential target for criminal proceedings.
Such price gouging restrictions may act as de facto price controls. Wholesalers and retailers could be legally liable if they charged the market price and thus would hesitate to do so. If this happens, it could create shortages similar to those caused by outright price controls.
5. Raising Fuel Economy Standards -- Congress' best ideas on energy focus on expanding domestic supplies. Proposals are pending to open up the Alaska's energy-rich Arctic National Wildlife Refuge, as well as the 85 percent of America's offshore areas that are currently off limits. One thing that has held up these efforts before is the complaint that they're not "balanced" -- that they only deal with supply and fail to suppress energy demand. This has led some lawmakers to call for tightening federal Corporate Average Fuel Economy (CAFE) standards in any energy bill that expands supplies.
But do the American people really want or need the federal government dictating their vehicle choices? Anyone who wants a fuel-efficient vehicle is free to buy one today, and there are many such models to choose from, including a growing number of hybrid models. And evidence indicates that the public is already responding to high prices, both by cutting back on discretionary driving and by purchasing more fuel-efficient vehicles. It's hard to imagine how consumers would benefit by having the government step in and mandate fuel-efficient vehicles, especially given the safety concerns over smaller and less crashworthy vehicles that a heavy-handed CAFE increase could require.
Thus far, the congressional responses to $3 gas have been long on federal intervention in energy markets, grandstanding against big oil companies, repeating the energy policy mistakes of the past, and intruding on personal choice. Other than a promising offshore drilling bill, hardly anything worthwhile has much chance of passing before the elections. But given the desperation of incumbents fearing an angry electorate, any of these bad ideas could end up as law.
Ben Lieberman is senior policy analyst in the Roe Institute for Economic Policy Studies at The Heritage Foundation.