The Bush Gas Tax and Protecting Narrow Interests

Bob Woodward recently revealed that the Saudi government promised President Bush that it would lower crude oil prices by mid-2004 in order to quell consumer dissatisfaction and to prime the economy. No one should be surprised by such collusion, because the Bush administration's entire energy policy — from the first days of the administration — has been orchestrated in order to meet its own needs and those of its patrons rather than the needs of American consumers.

From his first days in office when he opposed a cap on the price of wholesale electricity in California as the state's power markets were in turmoil[1] through support for energy legislation so laden with giveaways to the oil, coal and nuclear industries that neither Democrats nor Republicans could stomach them,[2] the Bush administration's energy policy has been all about enriching the president's friends at the expense of the American consumer.

Under the president's "supply-oriented" energy plan home heating oil prices have risen over 22 percent, electricity prices have risen 7 percent, natural gas prices have soared by 63 percent, oil prices are up 31 percent. But it is gasoline prices, which consume over half of the average household's energy budget, that are hitting American families the hardest.

Contrary to energy price trends, which generally rise when global economies are booming and demand for energy is high, oil prices have risen sharply throughout the Bush recession and its sluggish recovery. The average price of gasoline reached a new record high on Monday, May 24th, with the nationwide average price of regular gasoline reaching $2.104 per gallon,[3] 68 percent higher than the average price in the four years prior to President Bush taking office, when the economy was booming.[4]

Translating this data on higher gasoline prices into costs to the typical American household demonstrates that for each year since 2000, in spite of a recession and a very sluggish recovery, the typical American household has spent $360.25 more per year for gasoline than it did on average during the previous four years, when the economy experienced an unprecedented economic boom.[5] This $360.25 per year translates into a de facto Bush Gas Tax on all American households. And unlike a tax increase passed by Congress and signed by the president which would generate revenue for federal education programs, homeland security or deficit reduction, revenues generated by the Bush Gas Tax will go into to corporate coffers of major oil companies or OPEC nations.

The effect of this Bush Gas Tax on American families is perhaps best measured in the context of the Bush income tax cuts. The Urban-Brookings Institution Tax Policy Center determined that half of all households that received Bush income tax cuts of less than $500 per year.[6] The Bush Gas Tax effectively confiscated over 60 percent of their tax cut and deposited it into the collective coffers of President Bush's largest corporate patrons, big oil, whose profits have skyrocketed during his presidency.[7] When calculation of the Bush Gas Tax is expanded to calculate the higher cost of the average household's entire energy budget, including natural gas, electricity, propane and heating oil, the average family will spend at least $528 more on energy during each year of the Bush administration over what they spent during President Clinton's second term, a Bush Energy Tax that exceeds their income tax cut.

The effect of the Bush Gas Tax extends well beyond campaign-season rhetoric and populist dislike of higher prices at the pump. Gas prices have risen sharply at a time when employment growth is only beginning to regain some strength. Consequently, households cannot hope to pay for higher gasoline prices with higher wages, or longer hours. The already overtaxed American family will thus struggle to make ends meet this summer and beyond.

The primary cause of high gasoline prices is high oil prices. And the primary causes of high oil prices are Saudi policy regarding crude oil production and the level of commercial stocks in consuming nations, President Bush's failure to successfully engage with OPEC, as he promised he would do in the 2000 campaign, and his failure to address the demand side of the equation in the United States as part of his energy policy.

As the world's swing producer of oil, with the world's largest reserves[8] and a particularly low cost of production,[9] the Saudis are the predominant influence on the price of oil. Their steadfast resistance to increasing production in response to growing worldwide demand,[10] particularly in China[11] and the United States,[12] until this past weekend has been the proximate cause of higher oil prices. When combined with an evolving Saudi policy to promote the shrinkage of commercial stocks in consuming nations,[13] and increasing uncertainty over security in the Middle East, which tension is a direct result of the president's foreign policy, there can be little doubt that the Saudis have been working hard to squeeze every last dollar out of their oilfields by maintaining high oil prices without choking off demand.

But President Bush's failure is equally stark. In the 2000 campaign, critical of President Clinton's approach to working with Saudi Arabia and other members of OPEC, candidate Bush said that President Clinton should simply "get on the phone with the OPEC cartel and say, '[w]e expect you to open your spigots,'"[14] promising that as president, he would "use the capital that my administration will earn, with the Kuwaitis or the Saudis, and convince them to open up the spigot."[15]

It is impossible to know what types of conversations the administration has been having with OPEC members, and for how long those conversations have been going on. If, however, we measure the success of President Bush's approach to working with OPEC by examining its results, as reflected in OPEC production and oil prices, then it has been a failure. In contrast to 2000, when OPEC increased production three times for an increase daily production of over 3 million barrels per day,[16] OPEC is only now considering its first production increase in over a year,[17] and the price of oil is reaching record highs.

The Saudi's announcement on May 22, 2004 that they will increase production to their maximum capacity and then expand their capacity by 800,000 barrels per day in response to the threat that high oil prices pose to worldwide economic growth[18] highlights the magnitude of President Bush's failure. U.S. economists have stated for years that higher oil prices could threaten economic growth and undermine our economic recovery.[19] Yet as recently as March 31st, less than eight weeks ago, Saudi Oil Minister al-Naimi was calling for OPEC to implement production cuts, even as other OPEC nation's ministers expressed concern about the effects of higher oil prices.[20]

It seems incomprehensible that the Saudi's view of the state of the world oil market went from "satisfactory" on March 31, 2004 to such a critical situation by May that they were not only going to increase production, but also expand capacity, without a massive miscalculation of the oil market on their part. And if President Bush's administration had been as engaged with OPEC as he promised or as was the Clinton administration, the likelihood of such miscalculation likely would have been reduced

Finally, the failure of President Bush's energy policy to address responsibly our nation's demand for oil has placed additional upward pressure on the price of oil. In response to a question regarding how his energy plan would lower gasoline prices on the day that his plan was released, President Bush responded that "[b]ecause we recognize that we need more supply. And when you read the report, you'll see that we've laid out constructive ways to make sure that there are more supply available."[21] Two years later, Secretary of Energy Spencer Abraham acknowledged that much of the energy plan had been implemented, stating that "[t]he president's plan included 105 recommendations, about 96 of which we either have fully implemented or—-or—-or partially implemented."[22] Yet not only has the nation's supply of crude oil not grown, but our failure to address demand, through automobile efficiency standards or other policies, means that our demand has continued to grow unabated contributing to higher prices. And while the president and the White House would like to blame failure to pass energy legislation for high gasoline prices,[23] the Bush administration's own Energy Information Administration found that if the provision of the 2003 Conference Energy Bill were implemented, that gasoline prices would still rise in 19 of the next 21 years.[24]

If President Bush had been working to ensure that OPEC understood the consequences of its decisions, and if the Saudi's had increased production over the past year instead of waiting until the oil market was in its current state of disarray, stocks would have grown and prices would have fallen. If the president had developed and implemented a balanced energy plan that addressed both the supply and demand sides of the price equation, demand might be lower, and oil producing nations might be somewhat more wary of increasing prices to a point at which they support the development of alternative fuels. Instead, we now face an oil market that is facing growing demand, low commercial stocks, and an uncertain ability to increase production beyond that which has already been announced. In other words, we are close to the point where we are operating without a safety net, a very precarious situation.

One cannot help but wonder if the president's relationship with the Saudi's was sufficiently close that they would lower oil prices to help him out, a degree of influence that he himself bragged about in 2000, then why did he wait until now to use it when it would help him politically instead of using it three years ago, when it could benefit American consumers. Perhaps, the administration calculated that higher prices for the first three and a half years of the Bush administration would yield sufficiently higher profits for the president's patrons, and that lower prices for the last six months would boost the president's standing at the end of his first term. But isn't the president supposed to act in all of our interest for his entire term?

Ronald E. Minsk served as Special Assistant to President Clinton for Economic Policy (2000-2001) and as Director to the National Economic Council (1998-2000)