(March 23, 2012) There is a silver bullet for lowering gas prices: a return to a free market in gasoline.
The Republican presidential candidates blame high gasoline prices on President Obama’s failure to approve the Keystone XL pipeline and to drill drill drill. Obama blames Iran for heightening tensions in the Mideast, touts alternative energy, and claims no silver bullet can lower gas prices.
Both sides have a case but both come up short. There actually is a silver bullet, and it would lower gas costs by more than either imagines, for the U.S. and the rest of the industrialized world. The silver bullet is a free market in gasoline, something that was abandoned almost a century ago, when the auto industry convinced governments to finance roads through a gasoline tax, and something that subsequent government interventions have further distorted. A return to a free market would not only dramatically raise the supply of gasoline, as the Republicans claim, but would also reduce the demand, as many Democrats desire. The combination of higher supply and lower demand would whiplash gasoline prices downward.
Step one in restoring a free market in gasoline is removing its punishing taxes — levies of about 40¢ per gallon in the U.S. over and above the sales taxes that normally apply and much more in Canada and Europe. The road-building rationale for these extraordinary taxes will soon be ending in any case, both because governments now realize that they won’t be able to raise enough money in future through gas taxes to meet motorists’ needs and because modern toll road technology allows for true user fees for roads, based on the specific costs of using specific roads. When consumers pay for their gasoline at the pump, they should be charged the market price for gasoline, no more no less.
Unbundling the cost of gasoline from road use would enable the law of supply and demand to function. Once each new road is financed on the basis of its ability to pay its own way, rather than from a pot of gas taxes that becomes dispensed politically, road building will become rational. Uneconomic roads won’t be built, resulting in less sprawl-related demand for gasoline. And because tolled roads tend to be free flowing — the price of driving increases as necessary to reduce congestion — less fuel is wasted in stop-and-start traffic. Tolled roads also reduce demand for gasoline by encouraging drivers to use their cars more sparingly — in tolled parts of London, for example, public transit use is up, walking is up, bicycling is up, taxi use is up, ride sharing is up and unnecessary trips are down as drivers, faced with more accurate pricing, reassess the costs and benefits of driving versus other modes of travel. As experience around the world shows, when consumers face unbundled price signals and better appreciate the cost of each mile travelled, they tend to drive less. Tolls discourage needless driving much better than gas taxes do.
This dramatic free-market decline in demand for gasoline, which would become more dramatic still as businesses’ natural gas vehicle fleets continued to expand, would accelerate the drop in gasoline prices if a free market also took hold in the supply of fossil fuels. Thanks to new drilling technologies, the U.S. has become the world’s fastest growing oil and gas producer in the world. Yet although it has become a major natural gas exporter and a gasoline exporter to boot, the U.S. underperforms because its federal government impedes production in areas it controls — all of the net increases in oil production have occurred on private or state lands. Some 85% of the U.S. offshore remains off-limits to drilling and, since the BP accident in the Gulf of Mexico, U.S. deepwater production has fallen by some 300,000 barrels per day.
For this reason, there are increasing calls for the U.S. federal government to turn over to the states much of its immense land holdings — it owns 83% of Nevada’s land mass, 65% of Utah’s, and 45% of California’s, for example. If the federal government did get out of the way, either by turning lands over to the states to manage or, better still, selling off all drilling rights — onshore as well as offshore — to the private sector, the world’s oil supply would soar and gasoline prices would fall further.
The same new oil and drilling technologies that are making the U.S. self sufficient in energy will also be able to make Europe self sufficient, and will be able to make Canada and Mexico — already large exporters — larger exporters still. Because the oil market is global, because the globe is awash in energy, and because about half the cost of gasoline stems from the cost of oil, the direction for future gasoline prices worldwide is down. As long as the direction for free markets is up.
Lawrence Solomon is executive director of Energy Probe.
This article first appeared in the Financial Post.