- The Washington Times - Wednesday, June 4, 2008

ANALYSIS/OPINION:

Oil fluctuates around $130 a barrel. The price of gas at the pump has climbed above four bucks a gallon. And almost everybody seems down in the dumps.

According to the University of Michigan/Reuters survey, for example, consumer confidence has plummeted in May to its lowest level since 1980. The Conference Board’s consumer confidence index confirmed these May doldrums, as it fell to a 16 year low.

And small business owners aren’t feeling too cheery either. Discover Financial Service’s April survey of small business confidence registered its lowest reading since the survey began in August 2006. Fifty-five percent of small business owners rated the U.S. economy as “poor,” with 29 percent saying “fair,” and only 16 percent claiming it was “good” or “excellent.” As for economic conditions for their own businesses, 49 percent said matters were getting “worse,” compared to 24 percent saying “better.”

Do rising energy costs play a part in these small business doldrums? Well, 65 percent of the small business owners surveyed said rising gas price negatively affected profitability.

Clearly, rising energy costs have drained the pocketbooks of consumers, hit the bottom lines of small business, and restrained economic growth. With the economy barely growing in the last two quarters, recession talk circulating and some big profit numbers posted by oil companies (which raises populist ire among certain politicians), Congress looks like it wants to do something on energy policy. Unfortunately, what’s being considered makes no sense.

In late February, the U.S. House of Representatives passed a bill (HR 5351) by a 236-182 margin that would jack up taxes on oil companies by $17 billion. Earlier this month, Senate Democrats offered legislation that also would increase energy company taxes by $17 billion, while also slapping a 25 percent windfall profits tax on oil firms that do not invest in alternative energy.

From an economics perspective, this is just plain dumb. After all, prices and profits serve a purpose in a market economy. As prices and profits rise, consumers have increased incentives to conserve, while incentives on the supply-side point to greater investment in energy production and innovation. Higher taxes distort market signals and reduce the incentives to make the necessary investments to meet our growing energy needs.

Make no mistake, when politicians talk about abandoning fossil fuels, that’s not just lofty rhetoric, it’s loopy. For example, the Energy Information Administration says 85 percent of U.S. energy demand in 2006 was met through oil (39.7 percent), natural gas (22.4 percent), and coal (22.6 percent). That’s not expected to change much by 2030, with EIA projections at 80 percent of our energy coming from fossil fuels - again, oil (34.9 percent), natural gas (19.8 percent), and coal (25.3 percent). And the International Energy Agency expects global energy demand met by fossil fuels to rise from 81 percent in 2005 to 82 percent in 2030.

Barring some dramatic revolution, the U.S. and world economies will be reliant on fossil fuels for the foreseeable future. Given that reality, we need a far different energy agenda.

For example, rather than trying to stymie oil and gas production through higher taxes, Congress and the White House need to act to eliminate unnecessary tax and regulatory costs on energy firms. Most critically, government lands and offshore areas must be opened up to energy exploration and development.

The American Petroleum Institute reports: “Federal lands hold an estimated 656 trillion cubic feet of recoverable natural gas, enough to meet the natural gas heating needs of 60 million households for 160 years (approximately 60 million households in the United States are heated by natural gas). Federal lands also hold an estimated 112 billion barrels of recoverable oil, enough to produce gasoline for 60 million cars and fuel oil for 3.1 million households for 60 years.”

But the government has placed much of this off-limits. That’s simply bad policymaking that raises energy costs for everyone.

Politicians closing their eyes and crossing their fingers, while pandering to and perpetuating economic ignorance regarding energy, does not make for sound policy. Congress needs to look at the hard realities, and act accordingly. If our elected officials do not make economically sound energy policy decisions, then high energy costs will persist, thereby keeping consumers, entrepreneurs and our economy down in the dumps.

Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council.

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