OIL MADNESS

Several months ago, George Bush expressed surprised that gasoline was approaching $4 dollars per gallon. Now that it's approaching $5 per gallon in California, Republicans are dusting off past non-starters and hope that Americans will once more be gullible to the promise of salvation at the hands of Big Oil. Democrats, on the other hand, distrust Big Oil and promise to tax windfall profits. Unsurprisingly, neither approach is convincing since none shows any understanding of the global market in oil.

Tap ANWR, array oil derricks along every coastline in the U.S., provide more incentives to Big Oil to find reserves ... yada, yada, yada. We could do all of that and not help reduce the price of gasoline one penny. What? How can that be?

First, the market in oil is global. Oil is shipped to places where it is most convenient to ship, provided that the consumers have the cash to purchase crude or refined oil. Since the late 1960s, the American west coast has been amply supplied by Alaskan crude. Refined in both Northern and Southern California, that crude has kept the west well supplied. It came as especially useful since the American west is not connected to the vast pipeline network emanating from Texas and Louisiana where Texas and Gulf Coast crude supply the Southwest, the Midwest and the East. What Alaska, Texas and the Gulf Coast could not provide was imported from Nigeria, Venezuela, Mexico and Arab countries. European crude from the North Seas was consumed in Europe principally.

What many Americans fail to realize is that a lot of Alaskan crude was shipped to Japan. Why? Because it was a lot cheaper to sell oil to Japan than to ship it around the cape or through the canal in order to get it to East Coast markets. Proposals to build a cross Canadian pipeline have remained on the drawing boards and are likely to remain so unless the exploitation of Canadian tar sands leads to a vast reconsideration of a trans-Canadian pipeline. Thus, even if ANWR is exploited, not all of this crude will flow to the US. Some will end up in Asia, especially China, if demand there keeps growing.

Yes, we could probably ramp up production along the shores and begin off-shore drilling, especially in the Gulf Coast off of Florida where Jeb Bush led the opposition for his two terms in office. Certainly, the refining infrastructure is there, although, as many have noted, there is a dearth of refining capacity in the U.S. as communities are reluctant to approve new refinery locations. As for Florida's opposition to off-shore drilling, Governor Crist, at least, promises a fresh look at oil drilling off the Florida coast. In any event, such oil at best would provide some relief a few years down the line, but will probably not buy us freedom from the growing oil trap.

That is, as China and India grow - and their middle classes expand - the demand for oil is going to increase worldwide, not remain static or decrease. Through conservation and the switch to hybrid technology, the West might be able to reduce its fuel consumption, as some western states such as Germany have managed to do. But overall, consumption worldwide is expected to grow. Alas, supply has not kept apace with demand. Older, successful fields are in decline. Alaska and the North Sea fields are on the down slope of the yield curve. Though perhaps there are vast reserves still to be tapped in Iraq and parts of the Middle East, political instability there promises uncertainty with respect to meeting world demand. Technological improvements may make the recovery of previously unrecoverable oil possible, and new technology can identify new, unexploited fields. Even global warming - to the extent that the Arctic icecap melts - might allow exploitation of Arctic oil fields.

What truly is needed is an alternative to fossil fuel, at least the fossil fuel that has lain dormant deep in the earth for eons. We can and should develop alternative fossil fuel sources that exploit plants requiring little or no fertilization and can grow in places where farming is not possible or not commercially feasible.

We also need to use resources wisely. Hamburg, Germany, for example, has agreed to take on some of Naples, Italy's trash for a few months in order to ease the garbage crisis there. In Hamburg, the trash is sorted and what cannot be recycled is incinerated for use by the city's energy network. Now that is using resources wisely.

Yes, the high cost of gasoline is hurting many consumers. Truck drivers are protesting the high cost of diesel fuel in London and Spain. American truckers are also feeling the squeeze. Eventually, higher transport costs will filter down to the consumer and lead to the rise in prices of both final goods consumed and the component prices of goods used to make other products. For the time being - with the exception of food - these costs have yet to be fully passed on to the consumer. But, they will be and difficult choices will be foist upon consumers, especially those with fixed or limited resources.

Subsidies to the consumer really aren't the answer either. They merely perpetuate undesirable behavior. And, they are often difficult to end once enacted. Look at how difficult Mexico is finding it to raise the cost of gasoline in the Mexican market, a fact noted by many drivers in the San Diego area who can fill their tanks for half of what it would cost in the U.S. Other subsidized markets are not much better: Venezuela or Iran. Brazil certainly benefits from cheap Venezuelan gasoline, as long as Brazilians are allowed to tank up in Venezuela. Iran, on the other hand, has had to ration gasoline in part because it does not refine its own oil and the price it must pay for imported gasoline outweights revenue generated at the pump inside Iran.

Subsidies to alternative fuel producers might help, especially if the marginal difference between energy produced alternatively and what it costs in the oil market is small. As the price of oil increases, many alternative sources of energy have become more competitive. That, at the very least, should provide justification for energy prices to remain high.

Governments could impose carbon taxes to lessen the cost differential between an oil-based economy and one fired by alternative sources of fuel. However, if the revenue from such taxes is used merely to prop up governmental spending in other areas, many consumers will be reluctant to support such taxes. However, if these revenues were used to fund research and technology for alternative sources of fuel and to establish and expand mass transit systems, then perhaps the public might be willing to accept such carbon taxes. It's not impossible, as Norway has demonstrated with respect to its expenditures on oil revenue received from its North Seas reserves. Other countries have demonstrated that dedicated carbon taxes can work.

What will not work are further subsidies to Big Oil. The least the Congress could do would be to end subsidies to Big Oil. Let them invest shareholder profits in the exploration of new oil sources. That's what they do best and what they should be doing with their "excess" profits. Failure to do so may well jeopardize the longevity of the companies themselves. Should they choose to invest in alternative sources of energy, by all means let them. However, we should not expect or demand that Big Oil develop alternative sources of energy. It's not what they do best and it may not be in their best interest to develop alternative sources, especially if these lead to a dimunition of profits derived from oil. Newer companies should be encouraged, especially those with great ideas and paucity of revenue to finance these ventures. Fortunately, the venture capital market is there to respond to such needs as long as energy prices remain high enough to encourage the development of alternative sources of fuel.

Now, compare this analysis with the nonsense spewed nightly by Democrats and Republicans. Same old, same old. As much as he was scorned, Jimmy Carter was in a sense correct. The oil shock of the 70s ought to have encouraged us to think alternatively. Instead, we relied upon the exploitation of vast new sources of oil - Alaska and the North Sea - and allowed oil to drop in price relative to inflation. Thus, oil was a bargain until it began rising with the explosive growth in demand from China and India and the silliness of American policy in Iraq. Now, it doesn't seem such a bargain, especially when consumers are forced to choose between filling the car's tank and putting food on the table. Let's not count, this time, on vast new reserves to buy us more time to the next crisis. Now is the time to go beyond fossil fuels from faraway times. Otherwise, it's just more madness. STOP the insanity!