- The Washington Times - Friday, March 31, 2000

The Clinton-Gore administration's hapless and incoherent management of foreign policy is nowhere as evident as in their bungling of the OPEC oil price increase saga.

The sorry sight of Energy Secretary Bill Richardson's tin-cup diplomacy (to use Tom DeLay's apt phrase) pleading to our so-called Persian Gulf allies to increase production and reduce prices is unseemly and inappropriate for the world's only economic and defense superpower.

Thus far, the on-our-knees strategy hasn't worked. Even though the Vienna meeting of the Organization of Petroleum Exporting Countries has resulted in an agreement that will generate a 1.7-million barrel a day output increase, this still falls way short of the 4 million barrels that were taken out of production a year ago, and fails to meet the 2.5 million quota increase analysts believe is necessary to replenish dwindling inventories.

A more important issue is, why hasn't President Clinton made it clear the United States opposes any attempts to rig production and prices? Instead of bickering over this or that production level, there should be a clear and unequivocal first principles statement that the United States favors free market competition and opposes all monopoly cartels. A year ago, when OPEC first decided to artificially boost prices, the administration should have mounted a domestic and international campaign replete with tough financial sanctions against OPEC's anti-market and anti-consumer practices.

Instead of attacking pro-growth Microsoft, which is expanding sales and reducing prices, why isn't the U.S. publicly criticizing anti-growth OPEC, which is curtailing production and increasing prices? A recent Zogby poll finds that only 1 in 6 voters say they believe that Microsoft's business practices have harmed consumers. But 66.5 percent believe pursuing the Microsoft suit was a bad use of tax dollars. Perhaps Mr. Zogby will soon test OPEC's popularity among motorists and taxpayers.

While crude oil prices could drop to $25 per barrel, they will stay well above the average $20 real price of oil registered over the past 10 years. And way above the $10 worldwide average marginal cost of producing new oil. Meanwhile, gas prices at the pump are likely to range $2 or higher well into the summer driving season.

Fed Chairman Alan Greenspan doesn't seem to think the OPEC oil shock will damage the economy, but the latest Conference Board consumer confidence survey shows economic expectations in March sank to a five-month low. A recent Rasmussen poll reports that 55 percent of American adults see the recent gas price increase as a "serious threat" to the U.S. economy. Fifty-nine percent favor elimination of the federal gasoline tax.

That brings us to the House Republican leadership and their own bungling of an opportunity to clearly express basic policy principles. Attempts to lower the Al Gore gas tax increase of 1993 were blocked by Bud Shuster and his road and highway pork barrel gang. But the leadership has signed on to Mr. Shuster's 50 percent rise in airline passenger fees.

Ben Gilman's international relations committee reported out an excellent bill that would cut U.S. assistance or arms sales to countries engaging in oil price fixing. Playing hardball with Saudi Arabia and Kuwait, nations that wouldn't even exist as independent states today were it not for U.S. efforts in the Persian Gulf war, would surely capture public support. But the sanctions were removed after a series of floor votes.

Mr. Lott has proposed a temporary moratorium on all federal gas taxes, but temporary tax cuts have no permanent economic growth impact. Independent truckers and car-pooling suburban moms require ongoing relief. Because the U.S. imports roughly 4 billion barrels per year, the $20 OPEC price increase is causing an $80 billion income transfer from U.S. consumers to OPEC producers. A big tax increase that could conceivably slow economic growth to less than 3 percent.

Unlike Al Gore, who prefers conservation to growth, Republicans should set policies that maintain growth and conservation. The most efficient way to offset the OPEC tax increase on consumers would be a modest 2 percentage point lowering of personal tax rates; in static revenue terms each point loses about $40 billion in revenues. Over five years, over half of the revenue loss will be recovered. But in the first year, consumers will recover.

Businesses also suffer from the OPEC tax increase. Each percentage point drop in the corporate tax rate comes to a $6 billion static yearly revenue loss. So for less than $20 billion, the top marginal corporate tax rate could be lowered to 32 percent from 35 percent.

If Congress wishes to focus on the gas tax rather than the income tax, the best medicine would be a permanent repeal of both the Bush Sr. 5 cents increase of 1990, and the Clinton-Gore 4.3-cent increase of 1993. Here is a bipartisan way to roll back the 50 percent increase in federal gas taxes that occurred in the last decade. Each penny reduction costs about $1 billion.

Tax cut measures such as these should be coupled with a rollback of regulatory barriers that have stopped oil drilling in the Arctic National Wildlife Refuge and offshore sites near California, Florida and the Gulf Coast. History shows there will be no environmental harm. Caribous and consumers can co-exist. With stronger economic growth, both will prosper. And the Earth will be in better balance.



Lawrence Kudlow is chief economist of CNBC.com and Schroder & Co. Inc.

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