In this year’s State of the Union address, President Bush challenged the country to end its addiction to oil, particularly foreign oil. Oil supplies 40 percent of the nation’s energy needs, and foreign oil accounts for 60 percent of all our oil usage, up from one-third 20 years ago. As is well known, a significant part of foreign-supplied oil comes from regions that have political and security issues.
Yet remember the well-used phrase, “If it was so easy, it would have already happened.” Unfortunately, this comment applies directly to our oil usage. There are no other fuels readily available today that provide the versatility and cost advantages of oil. Simply put, oil and its derivatives have no immediate viable alternatives.
But wait, wait — what about fuels such as ethanol, battery packs, and solar power? It’s technically possible to power a significant part of our economy with these sources. So why can’t we begin to move away from oil and gasoline toward these home-grown fuels?
We probably will, in small steps. But don’t look for the alternatives to supplant a major share of the petroleum market for one basic reason — economics. Even with hefty public subsidies and today’s prices of oil and gas, when up-front as well as operating costs are considered, the alternatives still aren’t cheaper for the large majority of consumers. One study estimated that ethanol becomes competitive only when gas hits $3.50 a gallon and stays there.
Advocates of energy alternatives don’t take this analysis lying down. They say alternatives do measure up, in dollars and sense, when the full costs of oil are considered. Specifically, they argue that oil and gasoline are under-priced!
Their reasoning is that oil and gas prices don’t account for two “external costs” created by the fuels. One is pollution. For example, although vehicle emission standards have improved, some air pollution is created every time a gasoline-powered car or truck is driven, and the cost of the pollution is not reflected in the price of gasoline.
Second is the claim that some of the country’s military and foreign aid expenditures are directly related to ensuring foreign oil supplies from unstable regions, and these costs are also not included in the price of oil-based products.
When these two costs are estimated, and I must quickly add there are several important assumptions that make the calculations open to debate, they suggest gasoline may be under-priced by as much as $1 to $1.50 per gallon. In other words, the full cost of gasoline, including both pollution and national-security expenditures, would today be between $3.25 and $3.75 a gallon!
Still, at these prices there wouldn’t be a mass exodus from the gas pumps. Research shows oil usage would drop about 15 percent.
So, this leaves an unpleasant realization. Barring some technological breakthrough, independence from foreign oil will not be achieved quickly and without cost. We can tax gasoline substantially more in order to motivate people to use non-oil alternatives, but in the interim suffer the stress this would put on family budgets.
Or, we can heavily subsidize energy alternatives through government grants and programs so that the price that consumers pay for the alternatives is in line with the price of oil-based fuels. However, the costs of these government efforts are ultimately borne by either today’s or tomorrow’s taxpayers.
Either way, energy independence from oil, which most desire, won’t come anytime soon. Once again, there’s no free lunch.
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.