How to solve the energy problem

Charles Krauthammer
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Posted: Jun 20, 2003 12:00 AM

WASHINGTON--Everyone agrees that the United States is far too dependent on imported oil. Liberals say we need to conserve more. Conservatives say we need to produce more. It is the most ridiculous debate on the American political scene. We obviously need to do both. Every barrel added to domestic production and every barrel subtracted from consumption has the equivalent effect of reducing our dependence on unstable and unfriendly foreign producers.

Since the invasion of Kuwait 13 years ago, the U.S. military has been on active patrol in the world's oil patch. With American soldiers at risk securing our oil economy, liberals have to be willing to discomfit a few caribou and allow us to start pumping new oil from Alaska. If we'd listened to their arguments the last time around, we would today be without the million barrels a day we get from the North Slope.

Liberals also need to get over their allergy to the cleanest form of energy, nuclear power. The administration has proposed support for a new generation of safer nuclear reactors. You'd think environmentalists would be enthusiastic. Nuclear energy is remarkably benign: no greenhouse gases or other pollutants strewn in the air, water and your lungs. Of course, like all energy, nuclear has its pollutant--there is no free lunch--but in this case you can find it, concentrate it, put it in box cars and ship it off to some God-forsaken mountain in the desert.

Yes, it will be a hazard to humans or whatever species succeeds us in 10,000 years or so. That is a pity. But we do have more immediate problems. Like today's terrorists, fueled by Saudi and other oil money.

Conservatives, too, will have to give up some cherished positions to encourage reductions in consumption. One of the reasons they have resisted consumption controls is our history of heavy-handed regulatory schemes. Mileage standards (CAFE) on automobile fleets hugely distort the economics of the auto industry and, indeed, helped create the entire sport utility vehicle explosion (an unforeseen consequence of CAFE standards that treated SUVs as trucks and thus subject to less-stringent mileage requirements).

We must reduce oil consumption. The very easiest way to do it is simply to artificially raise the price of oil--i.e., tax it.

Oil is currently selling at about $30 a barrel. Slap, say, a $5 (or $10--the bazaar is open) tax on every imported barrel. And most important, keep the new price--let's say $35--as a floor. The world market price is likely to fall as Iraqi oil comes online, as Venezuela stabilizes, and as Russian and Caspian producers ramp up production.

This presents a wonderful opportunity to capture the fall in oil prices in the form of taxes. Say oil drops to $20 a barrel. Raise the import fee to $15 a barrel, so the consumer keeps paying $35 a barrel net. The windfall goes to the U.S. Treasury.

The benefits of such a scheme are enormous. Fixed and fairly expensive oil prices will induce consumers to cut oil consumption. It won't happen overnight. People are not going to junk their SUVs, but they will begin to make choices favoring greater fuel efficiency over time, exactly as they did when oil prices rose in the 1970s.

The windfall to the Treasury can also be beneficial if the scheme is kept strictly revenue neutral: Every penny of the import fee should be returned to the private economy in the form of (1) lower taxes (my choice: lower payroll taxes), and (2) a government check to poor folks to compensate for their higher fuel costs.

If the oil import fee is high enough, consumption will be depressed, which will have the added benefit of further reducing the world price, further increasing federal oil tax revenues (and thus reducing payroll or other taxes), thus creating a virtuous cycle whose most important effect is a reduction in our dependence on foreign oil.

You can play with the numbers. You can alter the tax to create the desired reduction. You can debate whether it should be slapped perhaps just on gasoline, or maybe even all imported hydrocarbon energy. (Economist Irwin Stelzer of the Hudson Institute is developing a more fleshed-out form of this idea.)

But what is important is the principle: Increase production--Alaskan oil and nuclear energy, for starters--and decrease consumption by taxing imported oil. It is a simple solution. It requires only that each side recognizes the virtue of the other's argument. Which is why in today's Washington it doesn't have a snowball's chance of passage.