Oil addiction to drive US election  

Some of the articles in The Australian are starting to sound like they are written by tree-hugging hippies - the latest dispatch from the US declares the Republican party a prisoner of the oil industry, Al Gore the only US politican with any spine and the US belief that other countries should restrain internal consumption so that it can have more as untenable. At this rate they'll be quoting Chomsky before too long...

WITH Wall Street suddenly abuzz with talk of crude oil prices reaching $US200 a barrel and the three remaining presidential candidates apparently vying with one another to present the most politically opportunistic (and economically absurd) energy "plan", it is becoming increasingly clear that America's addiction to cheap oil is likely to be a major issue this November.

Unfortunately, if the recent level of discourse is any indication, there is little likelihood of anything useful emerging from the political debate. For that to happen, there would have to be an acknowledgment by politicians that the forces of supply and demand prevail in the global oil market, just like other markets, and are at the root of US dependence on imported oil.

Instead, as exemplified by the bizarre proposals from Hillary Clinton and John McCain for federal petrol taxes to be waived this US summer to alleviate high prices, politicians are barely able to even acknowledge the role of US demand in the oil market.

None of the political "solutions" being considered in Washington for high petrol prices even mentions consumer demand. Instead, Congress wants a quick fix by reducing the rate at which the US is building up its "strategic reserve" of crude (which is scheduled to double in size over the next year), or by tinkering with the tax regime, or by pressuring foreign producers to pump up their output, or by regulating commodity exchanges to deter "speculators". ...

While permanent prices of that magnitude are almost unthinkable for most Americans, they are not such a shock for consumers in other advanced countries where petrol taxes are higher -- $US4.50 per gallon at the pump translates to about $A1.28 per litre, for instance. The gap in expectations, in turn, reflects the long-term failure in the US to tax petrol at levels which reflect its scarcity, the environmental effects of its consumption, or the stated political desire to encourage substitution of other types of energy.

That gap is clearest among southern and western Republicans, from the current President down, who have long paid lip service to objectives such as lessened dependence on Middle Eastern oil while in practice depending on the US oil and gas industry for funding, support and patronage when out of office. But it also exists elsewhere in US politics -- almost everywhere else, in fact, as seen by the recent discussion about a summer tax "holiday" for petrol.

The superficial reasons for "doing something" about petrol prices during the coming summer are not difficult to understand. Prices traditionally spike in the summer months, when consumption is heaviest and voters taking their cars on holiday are most directly confronted with the cost of filling up. But cutting the federal tax would almost certainly lead to no change in end prices, since supply is effectively constrained to a set level -- by the production of refineries and capacity of import terminals. Cutting taxes would simply increase margins for producers.

Hillary Clinton's proposal for a petrol tax holiday was made marginally less preposterous than John McCain's by her linking it to an offsetting tax surcharge on any "excessive" profits earned by oil companies. This essentially made her plan a pointless and complicated shell game, as opposed to McCain's plan, which would simply line the pockets of the oil industry.

Of course most economists prescribe the opposite remedy -- higher taxes on oil and other hydrocarbons -- as the best way to encourage the US economy on to a more realistic energy consumption trajectory. After all, higher prices do lead to lessened consumption, as can be seen from the fall of 5 per cent or so over the past 12 months in US oil consumption, following the price surge.

But with the honourable exception of Al Gore, there is scarcely a single prominent current or former US political figure at present willing to advocate such a policy. ...

Witness a recent New York Times front page article, which decried rising domestic consumption of oil among oil producers such as Indonesia (now a net importer of crude) and Mexico -- consumption which, while it might indeed reflect rising economic output and standards of living in those countries, also left less of their sovereign resources available to be exported to deserving Americans.

Illogical and self-serving arguments are a commonplace in political and economic debates over almost any market or activity. There are almost always special interests willing to argue they should continue to be preferentially treated. But it is rare for such perspectives to be so prevalent, and for there to be so little political or institutional interest in encouraging a more truthful and realistic discussion.

More truthful and realistic discussion will happen sooner rather than later, of course, given the direction in which prices are heading and the impact this is having on the US economy. But it seems that this will be in spite of the political process, rather than as an element of it.