With gasoline prices close to $3 a gallon, President Bush this morning gave a disingenuous speech to an alternative fuels association about what he was going to do to stem the rising tide. There were a few flashes of candor and insight, but, on the whole, it was a sad example of political capitulation by a former Texas oilman who certainly knows better.
James K. Glassman
His best ideas were to urge Congress to cut the red tape involved in building new refineries and expanding old ones (he pointed out that a new refinery hasn't been built here in 30 years) and to call for fewer boutique fuel mixtures (condemning an "uncoordinated and overly complex set of fuel rules") and for a slowdown in the timetable for mixing ethanol with gasoline, again to meet government mandates. It's clear that shortages and price spikes are the result of an inability to move ethanol, whose production is still a cottage industry, around the country.
Bush also made a forthright plea to open up a small part of the Arctic National Wildlife Refuge for exploration, pointing out that, if such a move had been made 10 years ago, we'd be producing a million extra barrels a day (the U.S. uses about 16 million, of which roughly two-thirds is imported), and he said that "we can find crude oil in our own country in environmentally friendly ways."
But these ideas were mainly rhetoric. The right approach would have been to end the boutique fuels and ethanol nonsense once and for all. He should have pinned the blame where it belonged--on Congress, for refusing to take steps to encourage drilling on the Continental Shelf and for pandering to the ethanol (that is, corn) lobby by forcing drivers to use a pricey fuel with little environmental value.
The President's reasonable--if not forceful--words seemed an afterthought. He started his speech by, once again, criticizing Americans for their "addiction to oil." He used the same obnoxious phrase in his State of the Union Address. Excuse me for quoting myself, but here's what I wrote after that speech:
"America is no more addicted to oil than it is addicted to bread, to milk, to paper, to water, to computers or, in the immortal words of the late Robert Palmer, to love.
"We use oil--and other unmentioned but implied addictions like coal and natural gas--to generate energy that powers our cars, heats our homes, lights our cities, runs our factories. By the standard of what they do for us, fossil fuels are pretty cheap. They provide enormous industrial leverage."
It is fossil fuels that are helping to raise people out of poverty in India and China, fossil fuels that have helped the world economy to grow by 4.5 percent last year, its fastest rate in history. If forced to assign some kind of moral value to oil and gas, I would say they are good, not bad. But why moral language at all? The President--and I am not even mentioning the claptrap one hears from Speaker Denny Hastert, Senate Majority Leader Bill Frist and Judiciary Chairman Arlen Specter--is now using the lexicon of extreme environmentalists and statists. Again, he knows better.
After talking about addiction, the President said he was going to crack down on price gouging-- that old bugaboo. He said he had asked the Justice and Energy departments to find out whether the rising price of gas was partly the result of manipulation. This is absurd. The gasoline market is broad, fragmented and highly competitive. Price gouging has been studied many times, to no effect. Gas prices are rising because crude oil prices are rising.
All Bush has to do is read Chapter 11 of his own "Economic Report of the President," which concludes, first, that "the prices that consumers...pay for gasoline depend heavily on the prices that petroleum refiners pay for crude oil," and, second, that "crude oil prices have risen steadily over the past several years due to growing world demand."
In addition, this has been a tough year for geopolitical risk--which tends to boost oil prices in the futures markets. Chad, Iran, Iraq, Nigeria, Venezuela--all have been subject to real or potential supply disruptions. And the Persian Gulf remains a dangerous place.
Next, the President chided the companies that actually produce the energy. "We expect there to be strong re-investment [of] cash flows" in more energy production. Just what does he think these companies have been doing? Over the past 10 years, the large integrated oil companies have made capital expenditures roughly equal to their net earnings. In fact, between 1991 and 2005, ExxonMobil's cumulative capital and exploration expenditures (some $210 billion) actually exceeded the company's earnings. Chevron spent $11 billion last year alone.
Those expenditures involve enormous risk and long lead times. ExxonMobil, for example, spent 17 years and $3.5 billion on a deepwater development project in Angola. In 1988, when the company began its work, oil was about $15 a barrel.
But the oil price bounces up and down. Only a few years ago, it was less than $10 a barrel. It could be again. (In 2002, as the price of oil fell, Chevron's sales dropped by $5 billion and its earnings by nearly $3 billion--in one year!)
Or politicians could decide to tax away profits, or further favor uneconomic fuels.
Imagine you're the CEO of an oil company today, listening to Specter talk about a windfall profits tax, the President go on about "addiction" or Frist about "price gouging." Your main job as CEO is to allocate capital, to decide where to put your shareholder's money for the long term. Are you encouraged to make "strong re-investment [of] cash flows" in this environment? I doubt it. Maybe the best idea is to stash the cash in Treasury bills or buy a retail chain or give the money back to investors.
If politicians truly want oil companies to invest in drilling and refineries, the best tactic is to recognize that these firms are not villains. Gosh, maybe they're even heroes.
The President also talked about salvation through hybrids. These cars earn a $3,400 tax credit now, but there's a ceiling on the number of vehicles to which the credit applies. He wants the limit removed.
Hybrids are a terrific idea, but currently they are expensive to build. The typical hybrid, even with a tax credit and even with $3 a gallon gas, is still uneconomic compared with a conventional gasoline-powered car. But the way to drive down the cost of hybrids is not through more tax credits. Those credits dampen the incentive to close the cost gap.
President Bush lived and worked in the oil patch. He knows very well that oil is a commodity whose price moves up and down with global changes in supply and demand--movements that we can't affect all that much. What we can do is remove political obstacles to a well-functioning market. Such steps would increase supply and lower prices. But we shouldn't kid ourselves. The rising oil price is affected by geopolitical threats, but it is mainly the result of increased demand, which itself is the result of rising standards of living--which are a lot better than the alternative.
James K. Glassman is a resident fellow at AEI.