Jonathan Klingler | Wednesday, August 23, 2006
As a college student whose primary means of transportation are his old monogrammed Notre Dame sandals, last year’s astronomical increase in the price of gasoline hasn’t affected me much. When I moved out to D.C. for the spring semester, I walked and used the Metro to get around. So it was quite a surprise to me when I came home for Easter and it cost me almost forty dollars to fill my gas tank. Even though I was inclined to blame my local gas station for the cost, the truth behind higher gas prices is found in the fact that crude oil is a globally traded commodity which has to react to the demands and instabilities of markets around the world.
For the last few years, the Organization of Petroleum Exporting Countries has held back the growth of crude production to increase profits. This means that the growth of crude supply is unable to keep up with the growth of crude demand in developing nations. As workers in China and India are able to purchase cars for the first time, they enter the gas market, bidding against Americans for the next available gallon of fuel. This imbalance of supply and demand leads to higher prices for all crude oil traded on the world market.
Despite the undeniable fact that recent price increases are caused by the explosive economic growth of China and India and the desire of Iran, Venezuela and Russia to make as much money as possible from their limited crude supplies, some policy makers have decided that a windfall profits tax on American oil companies would help rectify the problem.
According to supporters of the windfall profits tax, or WPT, such a measure would add billions to federal revenue and prevent big business from extorting working families. Critics claim that taxing oil companies for being successful leads to decreased oil production and refining capacity due to the perceived lack of returns on investment.
Luckily for us, we are able to look back at the 1980s to examine the effects of the WPT. According to the Library of Congress, the WPT actually decreased domestic oil production by as much as 1.27 billion barrels and increased our dependence on foreign oil as increased marginal costs led to decreased extraction of oil from American wells. The increase in oil imports due to the WPT as well as the many exemptions in the WPT led to actual revenues being about $80 billion instead of the projected $393 billion return. The utter failure of this provision to collect revenues and isolate American oil prices from the world market led to its repeal in 1988.
Considering the fact that recent increases in oil prices exist because of foreign problems in supply and demand, I believe it would be a horrible idea to reinstate a policy which increases our dependence on imported oil. Increases in oil costs are a threat to the stability of the consumer gasoline market, and energy companies are investing significantly in biological renewable fuel technology.
As gas prices soar, the energy company that can first provide a cheaper fuel to consumers will be able to make great profits, and corporations are racing to get products ready for market. Shell Oil recently invested $45 million in Iogen, a Canadian technology company, to build the first cellulosic ethanol plant in North America. Oil companies know that their days are numbered, and are investing their “windfall profits” into new forms of energy so that they will be able to thrive once gasoline becomes too expensive for most consumers.
Corn-based ethanol has long been championed as gasoline’s successor for consumer energy needs. Politicians and energy companies have occasionally claimed that the U.S. will be able to grow all of its energy through corn-based ethanol. Unfortunately, using a food product like corn to produce ethanol would mean that a massive increase in corn consumption for ethanol production would lead to like increases in corn prices because of greater demand for corn to make ethanol.
A far better alternative to corn-based ethanol is cellulosic ethanol. Stalky celluloid plants like switchgrass can grow in currently unused pasture lands, and many have no significant commercial use today, so there would be no concurrent inflation in prices. Additionally, the cheaper costs of switchgrass compared to corn would make cellulosic ethanol almost twenty cents cheaper per gallon than corn-based ethanol. The National Resource Defense Council argues that an investment of $2.1 billion in cellulosic ethanol research and product development could make the US energy independent by 2050. As an added bonus, switchgrass makes an excellent shelter for field animals. David Hamilton of the Sierra Club says that cellulosic ethanol is environmentally friendly, and could reduce greenhouse gas emissions by 1.7 billion tons per year.
It is very rare that the Sierra Club and Shell Oil agree on anything. Sure, oil companies are making record profits, but they are investing those profits in new technologies that will lower fuel costs, help the environment and aid farmers. I say don’t look a gift horse in the mouth – feed it switchgrass.
Jonathan Klingler is a senior management consulting major and the President of the Notre Dame College Republicans. He currently resides in Keenan hall and enjoys Tolstoy and Matlock. He can be contacted at at firstname.lastname@example.org
The views expressed in this column are those of the author and not necessarily those of The Observer.