April 25, 2006 | By Nathaniel Ward

How not to solve high energy prices

Congress can do a lot to lower gas prices by eliminating counterproductive regulations.

Gasoline prices have surged in the past few weeks, cracking three dollars a gallon in places. In fact, a gallon of gas runs at $3.15 at the gas station next to Heritage’s headquarters—an increase of more than 50 cents in a month or so. And some gas stations have even run out of gasoline entirely in recent days.

So what do we do about it? Liberals have proposed raising taxes on gasoline and increasing fuel economy in automobiles. But, as Heritage’s Ben Lieberman explains, “the last thing consumers struggling with $2.60-a-gallon gas need is the government deliberately raising the price even higher” by tacking on new taxes. And new fuel economy standards will not only do nothing to help consumers, since extremely efficient vehicles are already available, but they will also make roads less safe as smaller cars increase the annual highway death toll.

Another ham-handed proposal, suggested most recently by a Republican, is for a “windfall profits tax,” a mechanism whereby the government would decide whether a company is too successful and impose a tax if it is. Congress should know better. The last time Congress imposed a windfall profits tax, Lieberman notes, the program backfired badly: “It discouraged expansion of domestic energy supplies and led to increased oil imports.” All things considered, “the WPT probably hurt consumers more through higher energy prices than the increased tax revenues helped them.”

Liberals and even Congressional leaders have also started talking about new laws against “price-gouging,” a practice whereby a retailer sells gasoline for more than some people think is “fair.” The only way to prevent something from being sold for “too much” is to impose a price cap, where the government arbitrarily decides how much something should cost. America tried price caps before, Ben Lieberman reminded us in September, the last time “price-gouging” came up, “and they were an unmitigated disaster. In fact, the attempts by Washington to force down prices during that decade backfired so badly—resulting in shortages and gas lines—that they should have served as a permanent cautionary tale.”

It should be remembered that one of Ronald Reagan’s first acts as President in 1981 was to remove gasoline price controls and other counterproductive regulations. Prices dropped and remained low for another two decades.

The real solution

Instead of looking at new and creative ways to make the problem worse, we should try to define the problem we’re facing. As Reuters reported on Sunday,

Nearly all of [the price] increase came as benchmark U.S. crude futures surged $8 a barrel over the two-week period, Lundberg said, reaching $75.17 on Friday amid strong demand and fears of supply disruptions in exporting countries like Nigeria.

Yet prices at the pump also reflect the higher cost of delivering and blending ethanol into gasoline, as mandated by federal and state laws designed to combat air pollution.

"Not only are these costs higher than for the additive ethanol replaced, MTBE, but ethanol is also in tight supply," analyst Trilby Lundberg told Reuters on Sunday.

In short, the problem is threefold: there’s more demand for oil than there is supply; foreign oil supplies might be disrupted; government regulations have increased the cost of production. The solution to high prices, then, is to increase production from more reliable domestic sources and to reduce the government regulations that drive up costs.

Much of the problem is self-imposed, Ben Lieberman explains. “Thanks to restrictions put in place years ago when energy was much cheaper, many promising areas in the U.S. are off limits to oil and gas production,” he says. “Not only has oil become more expensive, but the cost of turning that oil into gasoline has also increased. This is due partly to expensive and complicated regulations that dictate the recipes for gasoline (more than a dozen of them) and other regulations that have made it difficult for refineries to expand to meet growing demand.”

Heritage’s Andrew Grossman notes that not all of the absurd regulations are old. In fact, some of them date from last year, when Congress passed a new energy bill. “So a government-mandated change in formulations, combined with the switch to government-mandated summer recipes, which differ, as mandated by government, between different regions are causing regional price spikes,” he writes.

Ben Lieberman spells out a common-sense solution: “In a time of high oil prices, high natural gas prices, and political uncertainty in many oil-producing nations, America should make good use of the energy available here at home.” Congress should look to cut the red tape that prevents new oil and gas exploration and drives up the cost of energy for consumers.

President Bush took a solid step forward today by suspending a number of environmental regulations, allowing refiners to better meet demand. “Easing the environmental rules will allow refiners greater flexibility in providing oil supplies since they will not have to use certain additives such as ethanol to meet clean air standards,” the AP reports. It’s already working: the wholesale price of gasoline dropped eight cents on the New York Mercantile Exchange as soon as the President announced the change.

It’s an easy lesson that Congress keeps forgetting: the economy does best when the government gets out of the way.

Congress’s ‘emergency’ spending

So why does moving a railroad a couple miles so Mississippi can build casinos qualify as "emergency spending?"

Congress is continuing to debate an emergency bill to allocate funds for Iraq, Afghanistan and hurricane relief—a bill that also includes dozens of pork projects, like the $700 million proposed for the “railroad to nowhere” in Mississippi.

Brian Riedl, Heritage’s Grover Hermann Fellow, told The New York Times that much of the spending hardly qualifies as emergency spending:

“Emergencies are not true emergencies when you’re repairing highway backlogs that go back several years, when Congress is giving large handouts to farmers despite record farm incomes and when you’re relocating a rail line” whose change of course was proposed decades ago, said Brian M. Riedl, a budget analyst at the conservative Heritage Foundation. “That doesn't sound like an emergency to me.”

In fact, there’s already $14 billion of this sort of spending tacked onto President Bush’s $92 billion request—and Congress is poised to add $11 billion more, Riedl and Ron Utt report in a new paper. If Congress is “unable to muster a modicum of fiscal responsibility,” they write, this would be an ideal time for President Bush to dust off the veto pen.

“Federal taxpayers should not be forced to spend $700 million to reroute a working rail line—especially one that just received $300 million in repairs—to make room for casino development,” Riedl and Utt conclude. “This extravagant expenditure is an insult to those wanting to rebuild homes and schools destroyed by Hurricane Katrina. Senators should remove this provision from the supplemental legislation, and if they do not, President Bush should draw a line in the sand declaring this special interest addition to an emergency bill unacceptable.”

Are you concerned about high gas prices and runaway federal spending?

Last week, I announced our new challenge to our readers: we challenged each of our readers to sign up five of their friends to receive MyHeritage.org e-mails. We’ve had some success so far—but we need your help to spread the message of conservative reform if we are to remove unhelpful Congressional energy regulations and rein in federal spending.

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In other news

• Despite higher gas prices, consumers are increasingly confident in the economy, a new survey reports. One of the remaining economic uncertainties is the status of the 2003 tax cuts; Congress should act quickly to make them permanent—and permanently repeal the death tax while they’re at it.
• President Bush said Monday that removing Saddam Hussein from power was the right thing to do. “On the big decisions of sending the troops in, I’d have done it again,” he said.

Coming up at Heritage

To attend these or any other Heritage Foundation events, RSVP at Heritage’s events website. Or you can watch these events live online at Heritage.org. All times are Eastern.

• On Wednesday, April 26 at 11:00am, a panel of experts including Iraqi finance minister Ali Abdul Ameer Allawi will discuss entrepreneurship and civil society in Iraq.
• On Monday, May 1 and Tuesday, May 2, The Heritage Foundation will host its twice-annual President’s Club meeting in Washington, DC. Speakers include House Majority Leader John Boehner (R-OH), United Nations Ambassador John Bolton, television host John Stossel, columnist George Will, and Rep. John Shadegg (R-AZ) of the Republican Study Committee. The event is open to President’s Club members.

Nathaniel Ward is the Editor of MyHeritage.org—a website for members and supporters of The Heritage Foundation.

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