Politicians in search of the quick fix for oil

TOSS a barrel of $139 oil into the economy and the ripples will swamp some of the boats trying to stay afloat in the current sea of economic troubles. And planes. Airlines are grounding their least fuel-efficient planes in an attempt to cut costs. So fewer budget-priced seats will be available to holidaymakers. Businessmen, too, are beginning to respond to the rising cost of company meetings by discovering the virtues of teleconferencing. Of course, home-bound consumers and desk-bound businessmen could drive, but petrol prices being what they are, that, too, is expensive.

All of which adds to the pressure on politicians to do something. Not for them Ronald Reagan’s famous plea to his officials: “Don’t just do something, stand there.” Some sensible new policies are badly needed but that is not on the cards, since the inclination of politicians is to do the opposite of what needs doing.

In their never-ending hunt for the quick fix, politicians in America and Britain want to ease the pain at the pumps by lowering petrol taxes. Never mind that prices would soon rise so that the net effect would be to lower the tax receipts of the US and UK Treasuries and increase those of the House of Saud, Hugo Chavez, Vladimir Putin and others not kindly disposed to western democracies. Even if prices did fall, the result would be to encourage greater use of petrol, and to discourage the development of alternatives to the use of oil-based products.

The hard fact is that there are no quick fixes, none that would have significant effect in, say, the next 10 years. Review the list: Even if nuclear power proves to be economically viable, which becomes less likely with each new estimate of its cost, new plants will not be on-line for 10 years. Coal is available in abundance in friendly nations, but coal is the bête noire of environmental groups, more precisely, one of their many bêtes noires. Over 100 of the 151 coal-fired plants in the planning stages in America last year have either been denied permits, quietly abandoned, or are being contested in the courts by environmentalists. Ethanol is in disrepute as the switch from food to fuel production is driving up food prices with disastrous consequences for poorer nations. The electric vehicle remains more a hope than a reality because batteries that are quick-charging and long-lasting are simply too expensive to compete with petrol-driven cars, and lower-cost batteries take a long time to recharge and don’t get you very far down the road. Significant supplies of newly discovered oil might put downward pressure on prices, but the producing countries won’t allow exploration and development, Congress has closed off fields in Alaska and offshore US, and new fields in Brazil and elsewhere will take years to develop. The costs of solar and wind generation are dropping, and the number of such projects is increasing. Solar enthusiasts are encouraged by the success of last week’s €1.8 billion (£1.4 billion) flotation by EDP Renovaveis, the solar arm of Energias de Portugal. Solar and wind, though, remain heavily dependent on on-again, off-again subsidy programmes and anyway are not significant substitutes for oil.

There’s more, but you get the idea - the cavalry is not just over the hill, it has yet to leave the fort. Prices might come down a bit from time to time, or even by a lot now and then, but so long as China, India and other countries continue growing, enriching their bicycle-riding, rickshaw-pulling masses, and subsidising their petrol consumption, pressures on supply will remain severe. Oil prices will remain higher than they were , barring an unlikely huge increase in the value of the dollar. At some point, perhaps a decade hence, alternatives to oil will make their appearance on a scale that might matter - unless the oil-producing nations respond to the threat to their dominance of energy markets by lowering prices.

So in the long-term future Americans will become more like Europeans - a description for which I am indebted to William Hogan of Harvard University’s John F Kennedy School of Government, a long-time observer of energy markets. We will continue the shift that has left dealers with lots crammed with unsold 4x4s, and unable to meet the demand for more fuel-efficient vehicles. We will set thermostats higher in summer and lower in winter. Insulation levels will increase, and lighting levels decrease. All because we have refused to tax petrol so as to get the money into the US Treasury rather than let producing nations snatch it for themselves.

In short, economics works - if consumers are left free to adjust to higher prices in ways they find most agreeable and efficient. However, politicians prefer “solutions” that not unsurprisingly confer more power on them and less on markets. One such now being debated in Congress is the cap-and-trade system for reducing carbon emissions. Carbon taxes would be more efficient, and allow individuals and businesses to decide how to adjust their energy use to cut emissions, but cap-and-trade lets politicians decide which lobbyists get permits for their clients, and which are so ungrateful that they do not. Best of all, politicians get to decide how to employ the trillions that will be paid for permits. This undercover raid on energy consumers and plan to enhance government power has the approval of both presidential candidates. John McCain and Barack Obama have drunk deeply of Al Gore’s global-warming potion while zooming around the country in private jets and racing to meetings in the large Chelsea tractors favoured by them and their entourages. No light carbon footprint for them.