Oil: What Must Be Done

More and more, it looks like the era of low oil prices has come to an end. Oil has risen to over $39 a barrel, something that almost no one expected just a few months ago. Gasoline prices, before adjusting for inflation, have hit record levels. Oil alternatives such as natural gas, coal, and even uranium have been heading up as well. In fact, in an Apr. 27 speech, Federal Reserve Chairman Alan Greenspan noted that high prices in the long-term oil-futures market suggest that petroleum is going to stay up for several years.

Some of the petroleum price hikes represent the effect of one-time shocks, such as unexpected refinery outages. But most of the upward pressure on oil is the result of increases in demand and potential supply disruptions that may not abate any time soon. On the demand side, strong economic growth in China and the U.S. is driving up global oil consumption, according to the International Energy Agency. Record sales of sport-utility vehicles, for instance, have helped drive up gas consumption in the U.S. by 4.6% over the past year.

While there's enough supply in the global oil market to meet the increased demand for the near term, most of it is coming from unstable or potentially unstable countries such as Saudi Arabia, Russia, Angola, and Venezuela. Indeed, terrorist action against oil pipelines, refineries, and loading facilities looms as an increasingly real threat, especially after the murder of five Western oil workers on May 1 in Saudi Arabia. That leaves the U.S. ever-more economically vulnerable to political turmoil around the world.

The situation is especially disturbing given that, over the past 20 years, the U.S. has done little to encourage oil conservation. Fuel-efficiency standards for cars are no higher than they were in 1985.

We need a comprehensive plan to reduce U.S. dependence on overseas oil. Since gasoline is the biggest oil product, the most obvious and useful step would be a big increase in the fuel-efficiency standards for cars and light trucks, including SUVs, as Senator John Kerry has proposed. Such a measure, should be phased in over ten years to minimize its disruptive impact. The Bush Administration has proposed ticking up mileage standards on light trucks over the next few years, but much bolder action is necessary to cut gas consumption.

It's also important to change the tax system to encourage conservation. Among other things, that means ending the tax break for small-business owners who buy very large SUVs, which count as heavy trucks. Consumers also should receive a bigger tax break for purchasing vehicles such as hybrid cars, a measure both Kerry and Bush support.

Finally, any plan to boost U.S. energy efficiency requires a boost in federal funding for research and development, including money for studying such potentially useful technologies as fuel-cell-powered cars. Research into solar power and other alternative sources, which could be used to generate the hydrogen for the fuel cells, is also important. Such innovation is the only way to ensure that the growth of the world economy won't be choked by a lack of oil.

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