McCain, Gas and Taxes

"...McCain said his proposal to suspend the (federal) gas tax for three months this summer may need to be extended longer if high gas prices continue...."
Associated Press, July 18, 2008

Senator Hillary Clinton also supports suspending the 18.4 cents per gallon tax, which funds the US Highway Trust Fund that pays for building and repairing roads and bridges. Senator Barrack Obama does not advocate suspending the tax.

All taxes are unpopular, and the Republican Party has benefited enormously from cutting taxes and promising to cut more. The trouble is that when tax revenues are insufficient to cover the federal budget (as in every year since 2001), the Treasury borrows the difference by issuing treasury bills and bonds, most of which are nowadays bought by foreign governments, especially China. This situation has given China (the former Red China, its name before it started funding the US deficit) a malign leverage over US policy in Asia. Although President Bush blames big government spending for the deficit, not a penny has been spent by the federal government since he became president without his signature.

Republicans keep saying that reducing income tax rates encourages people to work and invest more. If so, what is the effect of cutting (or suspending) gasoline taxes? Encouraging people to drive more! But the more gasoline is sold and used, the higher world oil prices rise and the more gasoline will cost! So, part of the retail price reduction due to the suspension of the federal gas tax will eventually be offset by a rise in the price of the gasoline itself.

If the federal government reduces spending on road construction and repair due to lower gas-tax revenues, our infrastructure will deteriorate. In the case of bridges, reducing maintenance and repair can result in catastrophic collapses, as occurred in Minnesota a few months ago.

McCain also favors increasing the supply of domestic oil by drilling offshore, but not in the Alaska National Wildlife Refuge (ANWR). I say lets drill for oil both offshore and in ANWR (1). Critics (including many Democrats) note that any oil from these locations will not be available for about seven years; true, but if we do not drill in these places, in seven years we will be even dependent upon foreign oil than we are now!

Americans are responding to the dramatic increase in gas prices by driving less and switching to smaller cars, just as classical economic theory would predict. Fine, but we also must plan for a future less dependent on oil, especially imported oil. The best hope is electric cars, and the batteries we will need for them are now in development. If a method of transmitting electric power without wires can be developed in the future, the electric car will quickly replace the internal combustion engine and the demand for oil will plummet. Since electro-magnetic radiation needs no medium for transmission (which is why we don't need wires from the sun to deliver solar power), the idea seems possible.

As the world becomes more industrialized, demand for petroleum rises, and so does the price of oil, until some future technology will replace the burning of fossil fuels. This is a worldwide mega-trend, and no nation can stop it. However, part of the increase in oil prices is due to the "soft" US dollar, which has been sinking in value relative to the euro and other currencies. Our Federal Reserve Board could strengthen the dollar in international markets by increasing interest rates, but the Fed is loathe to do that now, since that would hurt the stock and real estate markets, both already in big trouble. A stronger dollar would also make American exports more expensive, which would boost unemployment.

It would be nice if even one of our two major parties or several minor parties (Green, Libertarian,, etc.) would come up with an energy policy that could deliver results in the long run, but don't count on it.

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(1) See "Frozen Assets", the March 29, 2005, Glazerbeam posting.

Is NAFTA Still Nifty?

Democratic candidates Barack Obama and Hillary Clinton agree on this: the US should threaten to withdraw from the North American Free Trade Agreement (NAFTA) unless the other two parties (Canada and Mexico) agree to re-negotiate several important terms.

For Senator Clinton this is an awkward stance to take, since her husband President Bill Clinton negotiated NAFTA and won Senate approval, primarily on the strength of Republican votes. If NAFTA needed to be "fixed" as she now says, why not say so then?

Big labor opposed NAFTA in 1993 because of fear that American jobs would be lost to Mexico, where wages and benefits are much lower and environmental standards much less troublesome. Many jobs have been lost, and big labor today is still against NAFTA. The problem is especially severe in Ohio, where the candidates will be squaring off Tuesday in a presidential primary.

NAFTA, a key component in globalization of trade, is good for America in many ways. Millions of American jobs have been created due to NAFTA. For example, Canada is Wisconsin's largest foreign market. Moreover, Canada (not an OPEC member) is the largest source of imported oil to the United States. The oil-sands of Western Canada are reliably estimated to contain about 175 billion barrels of recoverable oil. (1) Only Saudi Arabia, a much more risky source, has more. Under NAFTA, Canada cannot reduce exports to the US unless d0mestic consumption is rationed by the same factor.

If the US invokes its right to withdraw from NAFTA after a six-month period, Canada would be free to ship all its oil to China, where the precious liquid could command a higher price. For this reason, no American president is likely to actually pull-out the trade agreement. But if a threat to withdraw from NAFTA is not credible, why do Clinton and Obama believe that Canada or Mexico would amend the treaty to make it more favorable to American interests? Why would re-negotiation benefit the United States, rather than Canada or Mexico?

The trouble with free trade is that, even if it results in a net increase in jobs, some jobs are inevitably lost. Those who obtain new jobs as a result of reduction of trade barriers are often unaware of the cause of their employment-----they would attribute their prosperity to a good work record or top-notch skills, rather than to NAFTA. Their votes do not reward the backers of free trade; they more likely vote on the basis of national security concerns, taxes, crime, or moral issues. The beneficiaries of free-trade are widely dispersed, often over many states. Free trade does not pay-off at the ballot-box

On the other hand, those who lose jobs due to foreign competition are intensely aware of the source of their problem, and will vote against free-traders. The latter are also more likely to be concentrated in declining industrial areas, such as many of the older cities in Ohio, so the political effect of their animus toward free-trade agreements will be palpable.

This dichotomy between the winners and losers in the free-trade economy explains what we have seen in Ohio. The only good news is that whoever wins the presidency will promptly forget whatever promises he or she made to the unemployed voters in Ohio, and NAFTA will survive unharmed.
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(1) "US Warned on NAFTA", Associated Press, March 2, 2008

The Truth About Foreign Oil

Take this quick quiz about our dependence on foreign oil:

1. What percentage of oil used in the US comes from the Persian Gulf?
a. 15% b. 25% c. 50% d. Over 75%

2. What country is the largest source of US oil imports?
What is the next largest?
a. Iran b. Iraq c. Saudi Arabia d. Canada e. Kuwait f. Mexico g. Venezuela

The answers from the June, 2007, issue of The Lamp, published by Exxon Mobil are:

1. a

2. d and f (in that order)

Here is the complete list of sources of oil used in the United States: (rounded to whole percents)

United States : 34 %
Canada & Mexico: 21
South America : 12
Africa : 15
Persian Gulf : 15
Other : 3

Are you surprised at how little of our oil comes from the Gulf and how much from the Western Hemisphere? I was! In fact, Saudi Arabia (for whom the US would do almost anything) is only our third largest foreign supplier, after Canada and Mexico.

Americans need to know this, because our foreign policy, including military action, is affected by public perception of our dependence upon Arab oil. Older readers will remember the 1973 Yom Kippur War, after which Arab states cut-off oil shipments to the US to protest American support for Israel. In case of another war in the Middle East, could the Arabs wreck the US economy by cutting off oil again?

Given the bellicose statements by President Ahmadinejad of Iran, coupled with that country's support for terrorism and continuing enrichment of uranium, I would estimate the chances of a war involving Iran within the next five years or so at more than 50%. Although the US does not buy Iranian oil, the destruction of Iran's pipelines and export facilities (highly probable if Iran goes to war) would cut the world oil supply enough to drive crude prices through the roof everywhere, which would hurt the US economy. If the war also involved other oil-exporting nations such as Saudi Arabia, Iraq, or Kuwait, the effect would be even more devastating worldwide.

Although it is beyond our power to control events in the Middle East, peace in the region is important for our economic interests. However, we must not allow the oil-producing countries to intimidate us into accepting their demands. Even if we do nothing to achieve energy independence, we could survive a total cut-off of Middle Eastern oil for an indefinite time. What we pay for their oil is a more important factor in their economies than their oil is in ours!

Nevertheless, the US should still take effective steps to reduce its dependence on foreign oil, if only to ease the potential harm to our economy if the supply is disrupted in the future. I expect that this will become a major issue in the 2008 Presidential Election. But will any of the candidates tell us this "inconvenient truth" (to use Al Gore's phrase): every effective measure to reduce dependence upon imported oil will reduce our standard of living in some respect. Here are our cholces:

Reducing Oil Consumption: Congress is considering raising gas-mileage requirements for American cars. A good idea, but that will result in lighter-weight cars made of thinner materials, so that collisions will be more expensive and injurious.
Replacing oil-burning electric power plants with nuclear or coal-fueled generators wouldl cut oil imports, but will require higher electric bills for consumers in the affected areas to amortize the cost of new construction. Both nuclear and coal plants have environmental problems, which can be expensive to ameliorate.
Synthetic fuels, which can be produced from corn, soybeans, or other crops, could replace petroleum, but right now they are even more expensive than imported crude oil. If world oil prices get anywhere near about $100 per barrel, synthetics will boom.
Raising the federal gasoline tax, an idea pushed constantly by NY Times columnist Tom Friedman, could cause some people (mainly lower-income) to drive less and thus conserve oil. Members of Congress with any hope of being re-elected will not vote for a tax big enough to have any significant effect.

Increasing Domestic Oil Production: For example, Congress could permit drilling for oil in the Alaska National Wildlife Refuge (ANWR), as advocated in the March 6, 2005, Glazerbeam (1).
The caribou won't like it, but fortunately they can't vote.
Another idea is to extract oil from the huge amounts of bituminous shale rock in both the western US and Canada. The trouble is that shale-oil, like synthetic fuel, is more expensive than imported oil at today's price. As the price of oil rises due to increasing worldwide demand, shale-oil will eventually become economically viable.

New Techology: If we could run cars on electricity,or some other form of energy, we could kiss OPEC good-bye and the real price of oil would decline in world markets. Electric cars and hybrids exist today, but have not attained mass appeal. Considering the enormous strides in science and technology made in the century since gasoline-powered autos were developed, it seems likely that a new "generation" of autos could replace the internal-combustion engine before long.
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(1) "Frozen Asset". The land needed for drilling, including roads, housing, and all infrastructure, would use less than one percent of ANWR.