Politicians seek to curb gas prices

Gas prices in the United States hit an all-time high this week, topping $4 a gallon in some cities. That, coupled with the rising cost of food and a faltering economy, has politicians scrambling to proffer solutions.

While presidential candidate Sen. Barack Obama, D-Ill., is lobbying for a tax hike for oil producers, fellow candidates Sens. John McCain, R-Ariz., and Hillary Clinton, D-N.Y., propose scrapping the federal excise tax on gasoline — at least for the summer. Meanwhile House Speaker Nancy Pelosi, D-Calif., is calling on President George Bush to stop filling the strategic reserve. Bush, however, is asking for more refineries and admonishing Congress for blocking past bids to drill in Alaska’s Arctic National Wildlife Refuge (ANWR).

“If Congress is truly interested in solving the problem,” he said at a press conference on Tuesday, “they can send the right signal by saying we are going to explore for oil and gas in ANWR.” But will any of these proposals have the intended effect?

Tax Oil Companies’ “Windfall” Profit (Supporters: Barack Obama, Hillary Clinton)

In response to the rise in oil prices during the early 1970s, the Nixon administration began controlling the price of gas for the consumer. This relatively short-lived effort ended under President Jimmy Carter. He instituted the windfall profit tax to keep the oil companies from reaping "huge and undeserved windfall profits" as the government lifted price controls. The windfall profit tax isn’t really a tax on profits; it’s an excise tax just like the cigarette tax or the gas tax. But the tax is paid by oil producers, not American consumers.

Obama supports taxing each barrel of American oil that sells for more than $80. The proceeds would go toward helping middle- and low-income Americans deal with high energy prices.

But taxing oil companies isn’t likely to drive the price of gasoline down. According to a report from the Congressional Research Service, Carter’s windfall profit tax decreased oil production by anywhere from 1.2 to 8 percent. “The biggest driver of gas prices is the price of crude oil,” says Sara Banaszak, a senior economist at the American Petroleum Institute in Washington, D.C. So from an economic standpoint, reducing the oil supply would drive the price of oil — and therefore gas — up, not down.

Take a Gas Tax Holiday (Supporters: John McCain, Hillary Clinton)

Embedded in the price of every gallon of gas is 18.4 cents of federal tax. McCain has proposed doing away with the tax for the summer to give consumers a vacation from high gas prices. Clinton has vowed her support.

Removing the tax would immediately lower the price of gas, but most economists say that lowering the price would increase demand, which would in turn drive prices up again.

“It will have anywhere between no impact and a bad impact,” says Robert Kaufmann, director of the Center for Energy and Environmental Studies at Boston University in Massachusetts. “People are willing to buy it at $3.50. If you lower it, if anything people will consume more of it.”

Obama vehemently opposes the idea. On Tuesday he called the plan a political gimmick. He also voiced concern that the lost revenue would impact the country’s infrastructure. Revenues from the gas tax go to fund road and bridge repairs. Clinton, however, says that implementing the windfall profit tax would compensate for the lost revenue.

According to the American Association of State Highway and Transportation Officials, the three-month tax holiday would save the average American driver just $28 — less than it costs to fill up a 10-gallon tank.

Stop Stockpiling Oil (Supporters: Nancy Pelosi, John McCain)

Each day, the United States pumps about 70,000 barrels of crude oil into the strategic petroleum reserve. On April 24, Pelosi asked the government to stop. The ensuing drop in demand on the market, she said, would lower gas prices from five to 24 cents per gallon. The proposal has the support of several other democrats and a group of 14 republicans.

The White House rejected the proposal, saying that it would not have much of an impact on price. Given that global demand for oil is 85 million barrels a day, a decrease of 70,000 barrels would lower demand less than one-tenth of 1 percent, Bush said. It is in our national interest to get the reserve filled, he added.

The United States began stockpiling oil in the mid-1970s, after the Organization of Arab Petroleum Exporting Countries decided to stop sending oil to countries supporting Israel. Today, the strategic oil reserve holds 701.5 million barrels of oil worth more than $80 billion.

Explore ANWR (Supporters: George Bush)

From a podium in the Rose Garden on Tuesday, Bush chastised Congress for repeatedly blocking legislation that would have allowed oil exploration in ANWR. “Instead of increasing costs, Congress needs to clear away obstacles to producing energy here at home,” he said.

According to a 2004 report by the U.S. Energy Information Administration (EIA), however, even if ANWR had been opened to development four years ago, domestic oil production would not have increased until 2013. By 2025, ANWR might have added anywhere from 600,000 to 1.6 million barrels of oil per day. Currently the average demand in the United States is 21 million barrels per day.

With respect to price, the EIA estimated that opening ANWR could lower prices by 30 to 50 cents per barrel by 2025 — if oil was just $27 a barrel as EIA predicted in that 2004 report. Of course , today oil costs more than $110 a barrel.

Either way, “this is not a short-term fix,” Kaufmann says. “We will not get significant quantities of oil for about a decade.” And even if we had drilled a decade ago, he adds, production wouldn’t be high enough now to significantly impact gas prices. “There’s always more than enough blame to go around,” he says.

Cassandra Willyard

Links:
The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy
"Oil: Is now the time to fill the strategic petroleum reserve?" Geotimes, March 2008
Analysis of Oil and Gas Production in the Arctic National Wildlife Refuge

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