6/12/2008

Gas Prices: A Failure of Conservatism

Gas prices have become one of the most important political issues this year. When the average price of a gallon of gas first reached $2 a gallon, there was shock. When they reached $3 a gallon, there was disbelief. And now they have topped $4 a gallon. People are suffering. Small businesses are suffering. Truckers are suffering. Farmers are suffering. Airlines are suffering. Everyone is suffering.

Last month I wrote about the absurdity of the gas tax holiday that John McCain has proposed. (Hillary Clinton also proposed this, but she's not a candidate anymore.) I argued that repealing the gas tax (currently 18.4 cents per gallon) would only encourage more consumers to buy more gas at a time when we're complaining about our dependence on foreign oil. Reducing our consumption of foreign oil and making gas cheaper by temporarily eliminating a fuel tax are not reconcilable.

To drive down gas prices, you only have two choices: increase supply or reduce demand. Repealing the gas tax does neither. Increasing supply can be done, but it is not a short term solution. Drilling in Alaska, the Mountain West, and the continental shelf along the Gulf of Mexico will take several years before the oil there makes it into our automobiles. Energy analyst Chris Nelder of Energy and Capital is skeptical about the overall value of these solutions for similar reasons.

The only short term solutions center around reducing demand. And this is where conservatism, and to a lesser extent liberalism, has failed.

Regarding the failure of liberalism, liberals would argue that high gas prices should drive down demand, thus leading to a greener environment. With slumping SUV sales, perhaps this is happening now. But it came too late for many people--at least as far as their wallets are concerned. When gas was a then astronomical $3 a gallon, Americans were still driving just as much as they were five years ago when gas prices were much lower. So in theory, while high gas prices should steer people more towards conservation or purchasing more fuel efficient vehicles, it has not happened in a timely enough fashion to avoid the current economic disaster taking place. And could the economy really sustain itself if people are forced to pay an artificially high price for gas? And how many people are willing to put the well being of the environment ahead of the well being of their personal finances?

Having said this, conservatism and the principles it supports are where I find the most fault. Here's why:

There are several reasons why the United States is having to grapple with such high fuel prices. The economies of China and India are growing, the distribution of oil supplies from the Middle East is disrupted, the dollar is weak, no new refineries have been built in the United States for decades, and there are untapped areas rich in domestic supplies of oil that we have not yet taken advantage of. Most people can agree on this.

There's another reason, however, why gas is so expensive. But nobody wants to talk much about it. It's us. And our consumer behavior regarding gas has given conservatism a black eye. (For a well written contrary view to this post, read this piece by Rick Frea at Freadom Nation.)

Increasing fuel standards for American automobile manufacturers has long been offered as a solution to rising gas prices. But the automobile industry has railed against this because they feared it would increase production costs and make their products less competitive. The major industrial areas of the Midwest and cities like Detroit would be particularly hard hit, so they have resisted increasing fuel standards.

Conservatives favor little or no government intervention when it comes to the market. "Letting the free market decide" is a common rallying cry by laissez faire capitalists and economic conservatives. It sounds good in principle. Businesses should have the freedom and flexibility to adapt to consumers' needs. But how has that turned out?

American automobile manufacturers are losing ground to imports, especially from Japan. Japanese companies tend to make smaller and more fuel efficient vehicles. Trucks and SUVs, while popular, are not as critical to the success of companies like Honda and Toyota. These companies make the top selling and fuel efficient Accord, Camry, Civic, and Corolla. They also led the way with hybrid cars like the Prius. American companies manufactured larger, more powerful, less fuel efficient vehicles. The Ford F-150 full-sized truck is the top selling vehicle in America, but its sales are slowing and Toyota has since become the #2 automaker in America as a result.

The increase in gas prices is pushing consumers to buy smaller cars. This is great for the environment, but it is bad for the companies that are making the vehicles people no longer want to buy. This means plants are closing. And when plants close, jobs disappear. Average blue-collar workers do not think about economic speculation and market forces when it comes to hitting the resume circuit. They're thinking about landing a job. And now these jobs are disappearing. So decisions made in corporate boardrooms about their product lineups have forced thousands of people out of work.

When gas was less expensive, people were happy driving large vehicles, some of which they may not have needed. They bought Hummers. They bought trucks. They bought SUVs. And they were not towing anything. And instead of driving these vehicles off road, they were driving them to the shopping mall or to soccer practice. Now they are feeling the pinch as they pay $60 or $70 to fill up their tanks.

At this point, conservatives would say there's nothing wrong. "Personal accountability," right? That is true. If you bought a gas guzzling Ford Explorer instead of a Ford Taurus, that's your responsibility. But this decision affects far more than just the family who bought such a vehicle. That extra $50 an unhappy SUV owner is spending at the gas pump is $50 they are not spending at a local restaurant, a small business, a department store, or a shopping mall. And that means small business owners are taking in less revenue, thus making it more difficult for them to compete with larger corporations that are also hit. So that translates into even more job losses because businesses become less profitable and have to cease operations at some sites. So in short, one person's poor choice can have ramifications that reach far beyond their own wallet. Put another way, the effects of "personal accountability" are not so "personal."

What about people who purchased SUVs and are still making payments on them even though the amount they still owe is greater than the rapidly depreciating value of their SUV? So these people can't sell their SUVs because nobody wants to buy them, but they must continue making the monthly payments to protect their credit rating. This would be another example of "personal accountability" or perhaps even "not living within one's means," but like in the previous example I cited, that is further decreasing the amount of money consumers can pump into the economy. They have less money to get a mortgage, buy a smaller car, or purchase a big-ticket item like a television. And the dominoes start falling again.

And what about small car owners? Consumers who drive smaller, more economical vehicles are paying more at the pump partly because other consumers who drive larger gas guzzling vehicles they don't need are placing a disproportionately high demand on gas. Conservatives would argue that the small car owners are doing the right thing and that how much gas you need should determine how much you should pay. But if more people were driving smaller cars, there would be more gas available (the supply would increase) and gas would therefore be cheaper. This sentiment is shared by Mike at The Pluribus Driver.

The market is indeed changing to meet consumers' demands as capitalism says it should, but this change has happened too late for too many people. And it's having ripple effects. The point of this post is not to criticize people for what they drive or to propose strict government regulation of business, but rather to remind consumers, economists, and politicians of all stripes that even though conservatism makes a lot of sense, as I argued in February, when it comes to gas prices and oil consumption, we are all in this together.

Will any politician have the courage to tell us what we don't want to hear even though we need to hear it?

10 comment(s):

Torrance Stephens bka All-Mi-T said...

we are just unwordly, we still 6$ below the rest of the world, we just catching up, a correction my folk did a review and interview on me so chk it http://pimpinpens.blogspot.com/2008/06/insights-and-highlifes-review-and_12.html

Taiwan Rogers said...

Anthony,
You are touching on the concept of individuality. It is the Holy Grail of Conservativism. The problem is, as you showed in your post, we are not disjointed individuals. We are all inter-connected. What I do in my personal life does have an impact on others, and vice versa.
As much as I would like to beat my chest and revel in my personal freedom I have to consider my brother next door.

Brett said...

Let's not forget the car as status symbol. For a lot of people (and western states' people in particular), your car is essentially an extension of your status - the bigger the better. What is personal restraint in comparison that type of primal instinct?

In any case, it looks like higher gas taxes are the way to go. They have the side-effect of encouraging automakers to make smaller cars.

The_Bad said...

I have to take issue with a couple items here:

We need to drill. Now.
I agree with your notion that drilling now does not alleviate the problem which exists in the “now”. However, I think that it is salient to mention that we could already be pumping from ANWR, had it not been the efforts of liberals to stop that from happening many years ago. The same argument was used back then. If we keep putting it off, we never get to the heart of the problem: like it or lump it, our society requires oil. We have somewhere in the neighborhood of 136 billion barrels that are untapped and unless liberals stop blocking efforts, they will remain untapped. This can be done in conjunction with addressing our problem in the “now” and it will help to avoid similar situations in the future.

Place fault where it belongs.
Directly after your statement, “conservatism and the principles it supports are where I find the most fault. Here’s why:” you cite (among other things) a lack of new refineries in the past 32 years as well as the aforementioned untapped resources. Quite frankly, the lack of refineries, nuclear generating plants, and refusal to drill in known oil caches falls squarely on the shoulders of liberals.

DB said...

Also needing mentioned is that the oil market is traded in US dollars and the dollar is quickly sinking which raises the prices of all goods, consumables and oil included. Supply and demand arguments neglect to include the affects of other products have on the dollar, which indirectly affects the price of oil. While conserving oil helps, it is the entire economic picture that determines the prices of oil not just the supply and demand of oil. Fixing our economy will fix the oil prices more than the improbable concept of consuming less oil. One can argue how to fix the economy (rebates, end the war, etc) but as you said, drilling is a long-term solution and the elections are right around the corner.

Thomas said...

I wonder why we are so surprised by the price of gas. There is less of it everyday and more and more people want it everyday. (China, duh!) I don't think gas prices are going to go down...ever.

What I don't understand about conservatives is why don't some of them use their vaunted business acumen to get in early on green technology. There is a lot of money to be made there. To me, conservatives today sound like what the horse-drawn carriage company owners must have sounded like a hundred years ago.

Freadom said...

Great post. I don't disagree with you per se, but I have a few comments to make nonetheless.

I've learned from my studies that the best way to solve problems with the market is to allow the market to fix itself. Something many politicians fail to want to do by setting up rules that hurt the oil industry by discouraging the building of new refineries or nuclear power plants. It is not conservatives who set limits on the market.

Likewise, it was the market that lead consumers to larger cars, not conservatives. When gas prices go up, the cars get bigger and vice versal.

Furthermore, IMO, it is the market that will lead the oil industry toward more fuel efficient cars, just like what happened in the late 1970s early 80s when the cars became smaller.

Gas prices being high is just the market being the market, and more regulations will simply make matter worse, as they always seem to do. And, it is my hope anyway, that the high gas prices will tick some inventer off and lead to something good (hydrogen powered cars anyone?)

Perhaps I'm wrong.

Anthony Palmer said...

Torrance,

Yes. Even though times are tough, Americans really do have it good when it comes to gas prices because we only pay about half of what Europeans and Asians pay. This is devastating their economies too, but those countries do not rely on personal automobiles like we do. There are a lot more bicycles, buses, and trains there, so they can adapt more easily. I was surprised at how convenient it was to rely solely on public transportation and biking when I was in Japan.

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Taiwan,

Yes, but unfortunately cognizance of our interconnectedness is what becomes branded as "big government" or a "nanny state." Those are political losers that most politicans don't want to touch. I don't advocate strict government regulation of anything, but I do think we should be less averse to the mere idea of government intervention. Individuality is good, but sometimes when people are left to their own devices, we all fail as a result.

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Brett,

You are right about the status symbol angle. And have you noticed how many of these people have their cars all decked out with chrome rims and booming stereos? And these people are complaining about not having enough money to pay for gas? This is where I agree with conservatism. People need to prioritize better and think more pragmatically. I drive a small hatchback that is completely paid for. Gas prices are hurting me, but they'd be hurting me a lot more if I were worried about letting people know my "status."

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The Bad,

You are right in that liberals are to blame for blocking drilling and nuclear power plant construction. No disagreements there. By the same token, free market approaches to the automobile industry have led to our stagnant fuel efficiency standards. And regarding nuclear power, it is indeed clean and safe, but NOBODY wants the waste to be stored near them. And no politician is ever going to let himself be branded as the guy who let their state be a nuclear dump site.

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DB,

Ah! I forgot to mention the weak dollar as contributing to the problem! So to boost the dollar, we'd have to raise interest rates. But that would potentially damage the economy, so I'm not sure what to do about that. We can't just keep printing money, that's for sure.

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Thomas,

I think conservative approaches to investing in new technology are slowly taking shape. Have you heard of the Chevy Volt? I think it can go 40 miles without gasoline. That might be too much of a hassle for most drivers, but it's a start. It's a late start, but better late than never, right?

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Freadom,

The market usually does fix itself. But what do you say to the employees who lost their jobs in the process? The blue collar guy in Ohio who worked at the truck plant that just closed down does not care about the market fixing itself. He's worried about finding another job. I guess what I'm trying to say is that there's a difference between statistics and reality. Market corrections may obscure the fact that wages or jobs may get cut, thus having far reaching ramifications. And the reason why I blamed conservatives (and not the market) is because conservatives oppose any government intervention in the markets. Perhaps if the government mandated higher fuel standards (that would be "big government"), the current crisis could have been averted.

Good discussion everyone. Thanks for your comments.

Thomas said...

In theory, I like what conservatives say. I think people should compete out there in the free market. Most of us here compete everyday, whether it be work or school. The problem is conservatives seem to disregard the free market when their rigid ideology gets in the way. The Terri Schiavo incident is one example. Most people were against the government intervening. Not conservatives. Most people are now against the war in Iraq. To that, Dick Cheney merely replies, "So."

We can also talk about Bear Stearns. The market seemed content to let Bear Stearns go under. Not the conservatives. There euphemism was that Bear Stearns was "too big to fail." Which inversely means the rest of us are "too small to care about."

The_Bad said...

Thomas – I think you’re being a little disingenuous in your notion about conservatives. Either that or you’re just unaware of the facts.

The fact is that the eee-vil Big Oil companies have been investing in alternative energy for quite a while. Last year, BP alone committed to $8 billion into alternative energy systems like solar and wind. I’m sure you’re response will be in-line with the liberal response listed in the article linked:

“While the rhetoric is promising, in the end, they’re still oil and gas guys.”

So, it seems that eee-vil Big Oil can do no right while the sacred and reverend Big Environmental Lobby can do no wrong ... except keep us from producing today’s energy. When left to it, the private sector will invest in the promising technologies of tomorrow. The government need not muck it up.

Prove me wrong: show me the conservative suggesting that alternative energy should “get a horse”. Conservatives simply suggest that we must not ignore what is in-the-now. Why is it such a difficult concept for liberals that alternative energy research can be done in conjunction with addressing the needs of the now? Are you suggesting that we just sit around and do nothing while these technologies are developed?

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