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Libertarian Perspective: How to Bring Down the Cost of Energy

By Fred E. Foldvary

We can't reduce the price of oil, but we *can* reduce the cost of gasoline and other fuels. Californians pay more for gasoline than the national average because of federal regulations, and Americans pay much more than necessary for energy because of taxes and restrictions that pump up the costs.

Speculators have been blamed for driving the price of oil up to $140 or more per barrel, but if that is the case, there is a simple remedy. The big users of oil, such as the airline and trucking industries, could sell oil futures contracts and drive the price down. The fact that there evidently has been no movement to do so indicates that the price of oil is up because of greater demand and limited supply. The price of oil for Americans is also up because the exchange value of the dollar has fallen. We can't change the global price of oil, but we can indeed change the price of the end product -- fuel for our cars.

Here are the interventions that needlessly make gasoline excessively expensive and some suggested remedies:

1. The federal Clean Air Act requires that some areas of California and other states use reformulated gasoline with specific additives. The price of gasoline in California is about 45 cents higher per gallon than the national average because of these federal regulations. Gas additives are supposed to produce less smog, but the regulations backfired when the MTBE (methyl tertiary butyl ether) additive leaked into the state's underground water. MTBE has been phased out, but other additives have replaced it, so with these regional requirements there still is no national market for gasoline. The federal Clean Air Act should be amended to eliminate the rule that requires gasoline additives. The price of gasoline in California would then fall to the national average.

2. Air pollution is a real problem, but the efficient way to handle it is by charging polluters for the damage rather than regulating gasoline and cars. California's smog tests and federal regulations on cars and fuel should be replaced by pollution charges. The state should install remote sensors that measure the actual pollution of drivers, then bill the biggest polluters. Those who drive relatively clean cars would be spared the expense of smog tests and taxes. There would also be a market for additives and engines that reduce pollution and an incentive to use them voluntarily.

3. The federal excise tax on gasoline is 18.4 cents per gallon; the state tax is 18 cents per gallon; and the state and local sales tax is on the total price, including the excise taxes. There is a sales tax on the excise tax! We can cut the price of gasoline by replacing all these taxes with pollution charges that would reduce the cost of gas for everyone except the biggest polluters. Eliminating taxes and restrictions also would enable folks to use cheap vegetable oil and grease for fuel, slashing costs by more than half.

4. Traffic congestion wastes gas. The remedy is tolls just high enough to eliminate congestion. The tolls would be levied using electronic devices such as the FasTrak used for bridge tolls. Carpool lanes would no longer be needed, since the tolls would generate an efficient use of streets and "tollways." Bridge tolls also should be changed to congestion pricing.

5. Federal and state restrictions on building new refineries should be eliminated. That would increase the supply of gasoline, reduce imports, and bring the price down.

6. The government should stop subsidizing ethanol and other alternatives to oil and gasoline. The market will discover the most inexpensive sources of fuel reflecting true costs when taxes and restrictions on gasoline are eliminated.

7. Jitneys and vans should be legalized and given "curb rights," or places for them to pick up passengers. They would provide flexible alternatives to cars and reduce gasoline consumption.

We can see that multiple state and federal regulations and restrictions needlessly make gasoline much more expensive than a truly free-market price based on real costs. The remedy is to replace taxes and restrictions with tolls and pollution charges and to liberate the market to let it produce fuel much less expensively than in today's state-distorted energy system.

Fred E. Foldvary teaches economics at Santa Clara University, where he is also an associate of the Civil Society Institute. His main areas of research include public finance, public choice, social ethics, and the economics of real estate.

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