An Opportunity on Oil

Don’t bite the invisible hand.

AFUNNY THING happened while policymakers hemmed and hawed about an energy policy: Price signals created one. The current oil spike may have an effect similar to the last one in the late 1970s and early 1980s, which drove a two-thirds gain in U.S. vehicle efficiency and huge advances in energy conservation by businesses. But the success of the coming energy transition will depend on how well policy complements price signals. On that, the omens are not good.

In the five years since Vice President Cheney convened his energy task force, oil prices have jumped from around $22 per barrel to a bit over $70. Energy companies now have ample incentive to bring new supplies to market: The three major U.S. oil companies are projected to increase spending on exploration and development by 30 percent this year. Consumers have ample incentive to drive less and buy more-efficient vehicles: Last year they bought a record 200,000 vehicles powered by clean diesel or hybrid motors. Anyone who remembers the furious arguments of the 1990s, when Congress resisted an energy tax that would have raised gas prices by a few cents per gallon, can only marvel at the can-do spirit of the market. While politicians dithered, the invisible hand worked.

But the politicians are not off the hook. The worst kind of policy actually smothers price signals. Both President Bush and Congress are promising to rescue consumers from $3 gasoline — by investigating companies for alleged price gouging, by sending out $100 checks as though government were some kind of fairy godmother, or by suspending the tax on gasoline or shipments to the Strategic Petroleum Reserve. Encouraging consumers to believe that they will be protected from high gas prices only discourages them from adapting. Families are less likely to carpool or buy an efficient vehicle; companies are less likely to search for ways to save fuel.

Another kind of error is to underestimate the environmental dimension of the energy crisis. Mr. Bush is a convert to the idea that the nation’s oil addiction is a problem, and in a speech last week he repeated that oil purchases fill the coffers of governments that threaten U.S. interests. If this were the only danger posed by oil, then drilling in friendlier territories might address it — and oil companies are doing that. But oil is also dangerous because of global warming, a subject entirely absent from Mr. Bush’s recent energy speech. To ensure that the main response to high oil prices is something other than just more oil production, government needs to act.

Washington Post