Dos and Don'ts on Energy Policy

The public anger generated by the recent spike in gas prices has led politicians to focus on energy policy. Given that high prices likely won’t abate during the summer driving season and given the coming midterm elections, we can expect a competition among elected officials to offer ideas to “fix” things. If policymakers are going to be enacting measures addressing the jump in gas prices, here are four dos and four don’ts they should follow.

Four Dos

1. States should repeal laws that mandate a minimum gas price. Believe it or not, some states make it illegal for retailers to charge gas prices that are too low. These laws aren’t directed toward businesses engaged in collusion, but toward larger, more efficient retailers who might enter the market in some locations and undersell smaller stores. Minimum price laws protecting inefficient retailers are antithetical to the American economic system and are an especially ripe target for repeal now.

2. Enact a gas-tax holiday not offset by other tax hikes. The federal government makes a “profit” from its excise tax on gas (18.4 cents per gallon) that is nearly twice the profit the oil companies make. Many state governments make even more. Some legislators have proposed enacting a gas-tax holiday, which makes sense unless other taxes are raised to compensate for the lost revenue. Gas taxes are collected to pay for road construction—any tax holiday should be coupled with a reduction in pork-barrel transportation projects.

3. Allow expanded refining capacity. America has not built a new oil refinery in three decades. At the same time that our domestic demand has increased 20%, our refining capacity has fallen 10%. Congress should streamline the permitting process for building or expanding American refineries.

4. Allow drilling in the Arctic National Wildlife Refuge. America has enormous oil resources that the federal government has put off limits. There are an estimated 10.4 billion barrels of oil that can be extracted in an environmentally friendly manner from the Arctic National Wildlife Refuge.

Four Don’ts

1. Don’t enact a windfall-profits tax. In 1980, President Carter enacted a windfall-profits tax on oil companies. The Congressional Research Service determined this tax reduced domestic oil production between 3% and 6% annually, while increasing oil imports between 8% and 16%. Taxpayers should remember that these tax hikes ultimately fall on them, as businesses will pass through much of the cost.

2. Don’t subsidize alternative energy sources. Some day it will no longer be economically worthwhile to base much of our economy on oil. As that day approaches, free markets will find alternate sources of energy. Even if politicians could do a better job than the markets in predicting which technologies will be successful (they can’t), they are hardly unbiased observers given the campaign contributions they receive from lobbyists seeking targeted subsidies.

3. Don’t enact silly schemes to send Americans $100 checks. Fortunately, this bad idea, which was actually proposed in the Senate, seems to have died a well-deserved death. Using Americans’ tax dollars to turn around and write $100 checks to those same Americans is an economically pointless, political gimmick.

4. Don’t enact price controls. Price controls cause enormous economic dislocation. Shortages and black markets are among the inevitable consequences. As economist Thomas DiLorenzo says, “There is a 4,000-year historical record of economic catastrophe caused by price controls.”

America’s high gas prices in this election year may lead to new energy legislation. That will be good news as long as the politicians keep these dos and don’ts in mind.