An American who spent sometime in Germany recounted his experience [Will Higher Gasoline Prices Inspire Lifestyle Changes, 2001] of energy prices in that country, "When I lived in Germany, the price of gasoline went from the equivalent of $2.50 per gallon to $3.25 per gallon over night. The Bundesregierung had added another $0.75/gallon gas tax, in addition to the existing $2.00 per gallon gas tax. (That's right: $2.75 out of every $3.25 per gallon was Federal taxes.)," He remembered the effect on prices on his use of transport, "I used the public transport system, easily the best in the world."
This is the direction our country will have to go too. Do we allow this country to be totally dependent on imported oil? Should we keep gasoline prices low to prevent development of alternatives or take necessary steps now to create a change in the present Gas Guzzling life style? The powerful petroleum lobby is preventing development of alcohol-based fuels. The present vehicles can use gasoline mixed with 10% alcohol without any modifications and without any loss of vehicle performance. The decision has to be made by people who are supported by the petroleum giants and it is unlikely that any decision will be made to reduce our dependence on gasoline until we can muscle our way into tapping cheap oil. Higher oil prices will prevent mindless use of energy resources. Even a $3.25 per gallon price will cause reduction in gasoline use, additional taxation to bring the price closer to European prices will cause a political upheaval but is bound to alter the present life style and very soon we will be exploring more efficient use of gasoline usage and alternates to reduce fuel consumption and the world will eventually be a better place due to these measures.
Negative effects of higher fuel prices on the economy
It would be absolutely incorrect to suggest that higher energy prices will not have an initial negative effect. Indeed it will have a severe effect especially because the prices in United States have been kept too low for a long time.
As energy prices have fluctuated up and down over the last two years, the consumers tend to do nothing to counter the effect of high oil prices; they believe the price increase to be temporary and continue to buy inefficient cars and other energy consuming items. They hope that the prices will drop as soon as we can resolve the Iraq issue or Katrina crisis and have to suffer in the process. In many countries with high energy taxes, short-term fluctuations are absorbed by varying the taxes but the high energy prices such as those in Europe make the people change their energy use habits benefiting them and the country.
Market prices for both natural gas and crude oil are currently hovering near historical highs. Whether prices are sustainable at these levels remains uncertain. Energy price forecasts by Global Insight and the U.S. Department of Energy suggest that we are entering an extended period of high crude oil and natural gas prices. Greenspan forecasted in 2004, "We and the rest of the world doubtless will have to live with the uncertainties of the oil markets for some time to come" [Crutsinger, 2004]. Isn't it time that we accepted that higher oil prices are here to stay and started to act to minimize the negative impact of higher energy prices.
Higher energy costs have a negative impact on the purchasing power of individuals, heavy energy using industries and firms suffer a lot, causing job losses, agricultural sector being a large consumer of energy also feels a major impact. Fertilizers are made from natural gas and an increase in energy prices increases the cost of agricultural inputs.
Higher Energy prices will have an initial impact of reducing net disposable income. The consumer items oriented industries such as electronics, automotive and travel industry will be most adversely affected as discretionary spending will be reduced. Industry dependant on oil such as power generation, transport services and agriculture will also feel the negative impact. Industries under strong competition with others may not be able to absorb the shock of higher fuel costs and are likely to suffer as a result of higher energy prices [Fenton, 2004]
For United States, the impact of increases in energy prices is different for energy producing and non-energy producing states. Oil rich states such as Oklahoma and Texas have fewer worries as higher prices has a positive impact too, oil and gas related firms generate more revenue resulting in increased employment and providing stimulus to the overall economy. The impact on non-energy producing states is negative without a doubt [Snead & Martinez, 2004].
What we have to appreciate is that higher energy prices will be an initial shock. The energy prices of 1970s helped us become more energy efficient. A drop in oil prices in the real terms made energy efficiency improvement of low significance and economically less attractive.
Energy prices in the countries of OECD are much higher than U.S. prices, but this has not reduced their competitiveness in a global market [IEA, 2004]. There is no reason that after initial adjustment United States will also adjust to higher oil prices. The government policies need to send a clear signal that energy prices will not go down, only then energy efficiency measures, alternate fuels, and energy efficient appliances will have a chance to develop to eliminate the impact of higher energy prices. In absence of such policies higher energy prices will not result in these benefits and the negative effects will impede the economic development.
Political impact of higher energy prices
If the present energy pricing policy is continued, there will be no political impact. The government is simply passing on the increased price to the consumers. Seasonal variations and impact of natural disasters such as Katrina are also tolerated and general public moans a little but hopes that the prices will go down soon and continues with life as normal. As the price rise is taken as a temporary spike nothing is done to counter the impact of higher prices.
What United States needs to do is to consider increasing the price to a higher value by imposing taxes. Ensuring that the higher energy prices are retained even if the energy price in international market falls involves a huge political risk. This is a policy no politician will like to advocate. When Al Gore presented his views on energy policy in his book 'Earth in Balance', the analyst were prepared to predict that "If there is a single issue that should insure the defeat of Al Gore in November, it is the rising cost of gasoline because that cost is directly attributable to the policies he has advocated in his book, Earth in the Balance, and during his career in the Senate and as Vice President" [Caruba, 2000]. Gore lost the election though not necessarily due to his views on energy.
If America is to find solution to its energy problems, the politicians will have to take some painful decisions to allow the country to reduce its oil imports by developing alternate resources. If we do nothing there is little doubt that gasoline prices will touch $4 per gallon in not too distant future and we will continue to wait for oil prices to drop as soon as the leftist governments in South and Central America change or Iraq becomes stable and remains pro-U.S., we will be wasting precious time and the economy will go into recession.
On the other hand if we can increase the price of gasoline by taxing it further to say $4 per barrel, it will make the public and the new technology developers that they can safely base their costing on the assumption that their will be a demand for alternate technologies and a future drop will not jeopardize their investments in alternate development. The tax collected from additional tax can be used to develop new fuels such as alcohol mixed gasoline or alcohol. Average price of gasoline in Tennessee today is $3.05 and an Internet advertisement is advertising a SUV that can give 28 miles per gallon. This would not be a sales pitch if gasoline was $1.25 per gallon.
Governments both Federal and states have to take politically risky decision of ensuring that energy prices are maintained at a level that encourages efficient utilization of energy, creates an incentive to use public transport and use taxes to provide incentives to build less fuel thirsty means of meeting our needs.
Potential benefits of higher energy prices
Higher energy prices may at first glance appear to be a nuisance which have to be tolerated if unavoidable but there are also many advantages of national and public importance in maintaining higher energy prices. Most oil importing countries use high taxes to discourage wastage and minimize imports. Fuel taxes are an…