Price of gasoline is not the reason to alter energy policy, to develop new policy, to change the behavior of large oil companies, nor, especially, to try to limit profits and affect compensation of domestically incorporated oil companies. Yet, this seems to be the focus of politicians, some of whom who want to increase domestic drilling for oil and others who want to move us toward alternative sources of energy – fossil or renewable.
Why? News this past week gave us two very important reasons why we are making mistakes in the way we think about energy policy, particularly when it comes to understanding what to do about the price at the pump of gasoline. The first came from yet-unpublished, political behavioral research reported by National Public Radio (NPR). The second was a report from the Congressional Budget Office (CBO), entitled, Energy Security in the United States.
NPR reported on the impact of belief. It used analysis of the public’s views of the ability of an American president to affect the price of gasoline by a Dartmouth College political scientist, Brendan Nyhan. It turns out that, during the Bush Administration, the public was just as divided as today about the impact of a presidential administration on the price of gasoline. The difference is that, during the Bush Administration, Democrats believed that the administration could have done more to lower the price of gasoline while Republicans believed that the President could do little to affect markets. Now, with the Obama Administration in place, it is the Republicans who tend to believe that the Administration could do something about the price of gas while Democrats tend to believe that little can be done. Explained Mr. Nyhan, the public’s opinion is driven more by the desire to resolve cognitive dissonance rather than by the facts; in other words, if we like a president, we believe that he would intervene in the energy markets if only he could have an impact. It is belief rather than fact that drives us.
The second important reason for explaining our energy policy mistakes came from the CBO. Its report looked at whether more domestic energy production, i.e., using policies and incentives that encourage domestic drilling for oil would lead to lower gas prices. The conclusion was that U. S. policy has little impact. The reasoning is pretty straight forward. Oil is a global commodity, and prices are set by supply and demand in a global marketplace. Production of more domestic oil may or may not be desirable, but the reasoning behind policy and policy-related incentives should not be derived from the goal of lowering the price at the pump of gas; global markets will set prices.
So, should energy policy be essentially a policy of support for relatively free markets? Probably yes. Despite what we may believe as a result of our political proclivities, the price of gasoline will be driven by the price of oil in global markets, produced and marketed by global companies. Where there may be reason to intervene in the markets, our policy and incentives should be focused on issues other than price. For example, one could use policy and incentives to assure an increase in domestically-controlled sources of energy, but the reasons would be our security needs, our desire to increase jobs in the energy sector, or our beliefs that certain sources of energy are in jeopardy or certain sources of energy are inimical to health or environment.
Nevertheless, very sound argument can be made that the market place is still preferred over intervention into it. For example, we do not have to produce oil domestically in order to reduce our security risks; we can stockpile oil that is produced abroad. In the end, we need to look very critically at energy policy and incentives that distorts markets, even when it appears to some, based on their beliefs, that intervention is warranted.