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Big Oil isn't the big problem

Government efforts to go after the producers won't get us anywhere.

June 24, 2008|Jacob Heilbrunn | Jacob Heilbrunn is a senior editor at the National Interest and the author of "They Knew They Were Right: the Rise of the Neocons."

Here we go again. Soaring oil prices have sent Washington politicians into overdrive to come up with a variety of legislative plans that aim to lower the cost of energy by targeting oil companies. Presidential candidate Sen. Barack Obama, for example, has declared: "I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy costs and other bills." It may sound good in theory, but if history is any guide, this is a pipe dream. The real danger isn't that Congress will do too little, but too much.

The recent past suggests that, in fact, efforts to influence the supply of energy can actually boomerang, driving up prices and consumption. Rather than demonize Big Oil, lawmakers should focus on tamping down demand.

Washington's record when it comes to forcing oil prices down by trying to manipulate the supply of energy is dismal. In August 1971, the Nixon administration, mired in an expensive war in Vietnam, worried about the state of the dollar and fearful of rising inflation, introduced wage and price controls for a period of 90 days, which turned into several years. President Nixon scrapped most of the controls in 1974 (they weren't working generally), but because government needed some sort of response to increased oil prices, he kept the provisions relating to energy. Under the scheme, there were limits on the price and therefore the profits on oil produced domestically. At the same time, however, there were no such limits on imported oil. Oil companies could make more money importing oil than producing it at home.

The result was predictable: The United States became more, not less, dependent on Arab oil-producing countries. As Americans lined up at gas stations and shortages occurred, the price of fuel soared. President Ford floundered. Not until Jimmy Carter became president were price controls mostly lifted in 1980, with President Reagan finishing the job in 1981. As part of a bargain with Congress, however, Carter supported a windfall profit tax on domestically produced crude. It meant substituting one bad idea for another.

Once again, a measure intended to help low-income Americans simply meant that the country became even more reliant on imported crude. Domestic production sank in the 1980s, and the tax never brought in much revenue to federal coffers. Reagan finally killed it in 1988.

Now that the cost of gasoline has more than doubled since President Bush took office and America's dependence on foreigners is greater than ever, Democrats are essentially vowing to revive the very same failed policy. It may sound good in theory, but if history is any guide, this is a fairy tale.

Consider Senate Majority Leader Harry Reid. Reid has been lambasting "oil barons" as though we were back in the bad old days of John D. Rockefeller and Standard Oil cornering the market. He is touting a Consumer-First Energy Act that would, among other things, punish oil producers with a complicated 25% windfall profits tax and create a government program to reinvest that money in renewable energy, perhaps with some of the same companies. That's too much government, too little common sense.

A worthier bill is the proposed Renewable Energy and Job Creation Act of 2008, which would extend tax breaks for alternative energy producers. It incentivizes innovation without the government deciding what is and isn't innovative.

The truth is that conservation and innovation are the key responses to the high cost of gasoline. Corporations are already adapting to the end of the era of cheap oil. Thus, the modest miles-per-gallon targets that Congress imposed last year may look irrelevant. In a superbly researched article in the current Atlantic magazine called "Electro-Shock Therapy," Jonathan Rauch shows that General Motors is in the middle of a crash program to reinvent the automobile by relying almost exclusively on electricity:

"With the Volt," he writes, "GM -- battered, beleaguered, struggling for profitability -- hopes to re-engineer not just the car but the way the public thinks about cars, the way the public thinks about GM, and the way GM thinks about itself."

More prosaically, the U.S. Department of Transportation recently announced that for six straight months, Americans have driven fewer miles compared with last year. And Americans aren't the only ones cutting back. China has stated that it will increase the cost of its subsidized fuel, which should slow the growth in energy use.

But more can be done. The approach of the United States and other oil-importing countries shouldn't be to create apprehensions among the Saudis and other exporters about the lessening demand for gas, it should be to scare them silly. Such fears prompted Saudi Arabia to declare on Sunday that it will increase production by 200,000 barrels a day to try to keep prices from going even higher.

After bungling the energy challenge in the 1970s, America now has a second chance to liberate itself. It should embark on a program of conserving energy, encouraging new technologies and developing alternative fuels, from solar to nuclear power, that will help wean it from its dependence on foreign oil.

Until then, the Middle East will continue to have Washington where it wants -- over a barrel.

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