Vol. X No. 21
June 24, 2005

Out of Gas

With oil hovering around $60 a barrel, you might think that the energy bill now being debated in the Senate would do something about high prices at the pump and our nation’s dangerous dependence on foreign oil. Think again. As even the President admitted this week, this bill will do nothing to provide consumers with short-term relief from $2.00 gasoline.

But what the President and his friends in Washington won’t tell you is that this bill isn’t going to lower gas prices in the long term either.

Politicians like to talk about energy as if it’s rocket science, but at its heart, America’s energy problems are really quite simple. So long as worldwide demand for oil grows, and America’s production diminishes, the cost of a gallon of gas is going to continue to climb. If lawmakers were really serious about addressing the high price of oil, there’s only two things they could do: increase supply or decrease demand. This energy bill does neither.

Let’s start with demand. With millions in royalty breaks for oil and gas producers in the Gulf of Mexico and Alaska, and $1.4 billion in tax breaks for enhanced oil recovery, this bill has quite a few provisions that will help energy companies’ bottom line. But the problem is that none of these handouts will actually encourage the industry to search for more oil. The President put it best: in April, he said, ““With oil at more than $50 a barrel…energy companies do not need taxpayers’-funded incentives to explore for oil and gas.” The President is right – high oil prices give energy companies all the incentive they need to drill and explore. Buoyed by high energy prices, ExxonMobil pocketed a record $7.86 billion in earnings in the first quarter of 2005; compared to the billions they are earning courtesy of the nation’s current energy crunch, the government’s handouts are mere pennies.

If legislators really want to have an impact on energy prices, they should focus on energy demand, where Congress has real power to make some broad, sweeping changes. But this energy bill doesn’t do that.

Instead, Senators claim they will lower the price of oil by providing incentives for alternative fuels. This is a bunch of baloney. The two alternative fuels in this bill, hydrogen and ethanol, are no cure for the nation’s energy woes. Scientists are at least a decade from creating an affordable hydrogen-powered car; and even when they do, it will still take another 10 to 20 years to build the infrastructure for a hydrogen economy. By that time, who knows how high gasoline prices will be.

Ethanol is no better as a solution. There are loads of ethanol handouts in this bill – loan guarantees for demonstration projects, $550 million for advanced biofuels, and $36 million for cane sugar ethanol projects. But this isn’t part of a national energy policy; instead, this is just a bunch of regional pork. The problem with ethanol is that it isn’t cost-effective, and it doesn’t have an energy content that’s as high as gasoline. A 90/10 gas/ethanol blend gets a fuel economy that is 3% worse than regular gasoline.

So what could Congress do to deal with high gas prices? For one thing, Congress could finally close the outrageous SUV tax loophole. The $25,000 tax deduction for SUVs over 6,000 pounds encourages Americans to buy huge gas-guzzlers that jack up the price of gasoline. There’s no reason why taxpayers should be paying for the richest Americans to drive around in their Hummers.

Another way to solve America’s energy problems would be to level the playing field for energy sources – not by adding new subsidies and tax breaks for fossil fuels and renewables, but by eliminating the ones we already have. By closing the tax breaks and royalty holidays for oil and gas producers, Congress would encourage companies to develop alternative fuel sources. playing field for energy sources – not by adding new subsidies and tax breaks for fossil fuels and renewables, but by eliminating the ones we already have. By closing the tax breaks and royalty holidays for oil and gas producers, Congress would encourage companies to develop alternative fuel sources.

For more information, contact Keith Ashdown at (202)-546-8500 ext. 110 or keith@taxpayer.net