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Executive Summary
America is too dependent on oil, and consumers are paying the price.
For the last two years, gasoline prices have been creeping upward. In
2003, a gallon of regular gasoline averaged $1.56; so far in 2005, the
same gallon has averaged $2.20, with prices in some areas spiking close
to $4.00 in August and September.
The recent rise in oil and
gasoline prices is the result of increasing demand bumping against both
natural and technological limits in the world’s ability to produce and
supply oil. This tight supply/demand balance, coupled with increased
market concentration in the oil industry, has left consumers vulnerable
to price spikes at the pump.
The long-term limits on oil
resources underscore the important ways in which oil does not operate
like other commodities. While market theory would suggest that oil
production would simply increase every time demand increases, the
geological limits of oil belie this assumption. Should demand continue
to increase—as is anticipated under current policies—the most likely
scenario is for prices to continue to rise, placing an even greater
strain on the American economy and consumers.
Meanwhile, oil
companies have raked in record profits. ExxonMobil alone made $25
billion in profits in 2004 and is on pace to surpass that amount in
2005. Essentially, high gasoline prices are helping fuel a massive
transfer of wealth from average consumers to large multinational oil
companies that benefit from America’s oil dependence.
With
consumers being drained at the pump and America spinning into a
worsening spiral of dependence, it is well beyond the time for
congressional action. Congress has opportunity to parlay the oil
industry’s record profits into proposals that will reduce America’s
dependence on oil and protect consumers in the long-run.
This paper outlines two policy solutions to address this problem.
Solution #1: Make our cars more fuel efficient.
The
best way to cut America’s oil dependence and shield consumers from
spikes at the pump is to make cars and light trucks go farther on a
gallon of gasoline. Congress and the Bush administration should
increase the fuel economy of the country’s fleet of cars and light
trucks to 40 miles per gallon and eliminate perverse financial
incentives that encourage manufacturers to produce and consumers to
choose gas guzzlers over more efficient cars.
Solution #2: Prioritize consumer savings over oil industry profits.
Growing
oil demand, shrinking supply, and anti-competitive nature of oil
markets provide compelling reasons for Congress and the Bush
administration to take immediate action to end the current transfer of
wealth to the oil industry and transition consumers to a less oil
dependent economy. We must redirect some of the record oil company
profits into measures that will dramatically reduce our oil
consumption. To this end, we propose:
• Repealing all existing
tax breaks for the oil and gas industry. Under current law, the oil and
gas industry would receive $10.7 billion in tax breaks between 2005 and
2009. Congress should immediately repeal all existing tax breaks for
the oil and gas industry and shift these incentives toward conservation
solutions that will help consumers.
• Instituting a windfall
profits tax. Congress should immediately enact a windfall profits tax
on oil that will recoup a portion of the oil industry’s record profits.
The windfall profit tax would only apply when the price of crude oil
exceeds $40 per barrel. With the estimated $26 billion in revenue
generated in 2005 alone from repealing the tax breaks and establishing
a windfall profits tax, we can pursue policies to ease America’s oil
dependence and save consumers money. For example:
• Congress
could double the tax credit available to consumers purchasing more fuel
efficient cars and remove all restrictions on the number of
fuel-efficient cars eligible for the credit. In addition, Congress
could expand the credit so that it applies to all vehicles that meet
the fuel economy and air pollution criteria, regardless of the
technology utilized. Every $2 billion of the windfall profit invested
in expanding this tax credit would allow approximately 318,000 more
consumers to benefit.
• Congress could increase funding for
public transportation, such as light rail. Currently, for every $4 that
the federal government spends on highways, only $1 is invested in mass
transit. This car-dependent transportation system fuels America’s
over-reliance on oil. Diverting $8 billion of the windfall profits each
year to public transportation would effectively double the federal
government’s investment in mass transit. Similarly, for $8 billion, the
federal government could build more than 200 miles of light
rail—resulting in a 20 percent increase in light rail infrastructure
nationally. Alternatively, the revenue could be used to reduce fares on
existing public transit systems. With $8 billion, the federal
government could enable everyone who rode public transit in 2003 to
ride for free.
• Congress could increase funding for the Low
Income Home Energy Assistance Program (LIHEAP), a federally funded
program that helps low-income households meet their home energy needs
through immediate bill payment assistance and weatherization upgrades
to make homes more energy efficient. Applying just $2 billion of the
windfall profit toward this program could help four million more needy
households this winter, when home heating costs are expected to be high.
America’s
energy problems are not going to go away on their own, nor can we
depend on the market to solve them. The U.S. government needs to step
in and help move America toward a more efficient, less oil dependent,
energy future while protecting consumers’ wallets, rather than oil
companies’ profits.
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