- The Washington Times - Tuesday, February 23, 2010

ANALYSIS/OPINION:

Robert P. Murphy is right (“Setting the stage for stagflation,” Opinion, Friday), but the primary reason for the combination of stagnation and inflation is oil prices. Our traditional approach to reining in inflation is to jack up interest rates, while our response to high unemployment is to reduce interest rates. What should we do when we have high inflation and high unemployment? Look at the root cause. In the 1970s, the cause of high inflation and unemployment was the oil price spikes caused by the Arab oil embargo, the Iranian revolution and the Iran-Iraq war. The problem was contained by reducing oil consumption through improved vehicle mileage and the 55-mph speed limit. During the ‘80s, oil production from Canada, Alaska and the North Sea helped drive oil prices lower.

We are once again poised for stagflation. The run-up of oil prices in 2008 gave us inflation. The economic damage caused by the high prices, together with the popping of the real estate bubble and exposure of banking shenanigans, brought us high unemployment. Now high oil prices are returning. We can’t increase production from the North Sea - its production is in decline because of depletion. Nor will Alaska make a big difference. It’s also in decline, and some guess the Arctic National Wildlife Refuge has just a six-month supply of oil in it.

While the price spikes in the 1970s were caused by politics and war, we will soon face oil decline driven by geology. Mexico’s production peaked in 2004, and its exports fell by 14 percent last year. Our peak production was 40 years ago, and we have been burning more oil than we discover globally since 1980. Of course, politics and war haven’t gone away. We face the threat of oil disruption at any time.

The key to preventing stagflation is to drive down our energy consumption. The best way to do that is to institute a strong tax on fossil fuels and allow people to find the best way to reduce their consumption and develop renewable energy in response. We could use the proceeds to reduce our exploding debt levels or rebate the tax back to the taxpayers to preserve the price signal without reducing income levels. We must leave oil before it leaves us.

CARL HENN

Rockville, Md.

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