Center for American Progress

A Progressive Response to High Oil and Gasoline Prices
Article

"We wouldn't be in this situation if Congress had acted and passed a comprehensive national energy policy."
Scott McClellan, White House spokesman, 3/21/04

VERSUS

"An energy bill wouldn't change the price at the pump today. I know that and you know that."
President George W. Bush, 4/20/05

A progressive plan to address high oil and gasoline prices must tackle the complex national security, diplomatic, economic, and environmental policies and objectives that impact them. In the near term, the most effective way to mitigate the impact of high prices on working families is to pursue aggressive policies that reduce demand for oil. Since oil is primarily used for transportation, progressive policies should focus on helping working families afford efficient cars and trucks that reduce their payments at the pump and curb our national oil appetite. Innovative energy policy will also spur creation of good, high-paying jobs to create the cars and fuels of the future.

In contrast, the president's energy plan fails to protect families from continued price spikes, worsens global warming and air pollution, and leaves us dangerously vulnerable to the whims of oil producing states. A 2004 analysis by the administration's own Energy Information Administration (EIA) found that the energy bill backed by the administration will actually raise gas prices and increase oil demand nearly 14 percent by 2010. It is time to move forward with a better alternative that enables families to be part of the solution, taking charge of their own transportation choices and curbing our addiction to oil.

"Until demand growth slows dramatically or supply capacity grows significantly more than seen in recent years, it is unlikely that WTI [West Texas Intermediate] will fall substantially below $50 per barrel for any significant period of time."
Energy Information Agency, 4/20/05

All indications are that global demand is increasing faster than oil extraction capacity. World oil reserves are being used up at three times the rate they are being replaced with new discoveries. According to the International Energy Agency, demand rose faster in 2004 than in any year since 1976 despite $50 per barrel oil prices. The producing countries, especially Saudi Arabia, are investing in upgrades to expand their extraction capacity, but this will take time, during which global demand will continue to rise. Since United States oil represents only 2 percent of world reserves, our production capacity provides no oil price leverage in the face of OPEC's overwhelming capacity. While there is no consensus as to when world oil extraction will peak – that is when extraction will begin to permanently decline – some investors and governments are beginning to take the issue seriously.

But supply and demand are not the only things driving up current oil prices. Some analysts believe that U.S. foreign and economic policies are pushing up prices and that changes in those areas would help cool off the oil market. For example, increased stability in the Middle East could lower the "risk premium" on oil.

In the complex equation of oil and gasoline prices, we have the most control over our own consumption. What follows are a set of recommendations to help working families deal with high gasoline prices while also redirecting a national commitment to a secure energy future and development of the jobs of the future.

Except for housing costs, low- and middle-income households in the United States spend more of their earnings on transportation than anything else. High gasoline prices squeeze household budgets in the families least able to adapt and most in need of reliable, affordable transportation.

Instead of helping working families save gas and cash, the president's energy plan rewards big oil and gas guzzlers with tax breaks. For example, Hummers, the least efficient vehicles on the road, still get a tax credit of $25,000 compared to the $2,000 credit for the most efficient hybrids on the road, and the Republican House energy bill would force taxpayers to compensate rich oil companies for leases that cannot be developed. Although the president has recently proposed to raise the hybrid credit to $4,000, this will not help drivers that cannot afford, or do not qualify for credit, to purchase a new car, leaving them with few options to mitigate volatile gasoline prices.

Progressive policy alternatives to help American families and small businesses deal with high prices include:

Low-income scrap-and-replace programs
Low-income drivers tend to own less efficient vehicles that are also often the least reliable, the least safe and the most polluting cars on the road. Scrappage programs designed to get the most polluting cars off the roads have already been used successfully in a few states. Just as the government helps low-income households meet their home energy needs through the Low Income Home Energy Assistance Program, progressives should adopt a policy that helps low-income drivers scrap their inefficient vehicles and replace them with efficient cars. This would help buffer them from volatile gasoline prices, decrease oil consumption, improve air quality, and create good jobs in the United States.

Two options for making efficient cars accessible to low-income citizens have been proposed by Amory Lovins. The first option involves federal procurement of a large volume of efficient cars for lease to qualifying individuals. The cost of insurance, gasoline and regular maintenance could be incorporated into the leasing price in much the same way subscription car-sharing programs, like Zipcar and Flexcar, do now. Volume purchasing of insurance and gasoline would lower these transportation costs.

The second option involves helping people who currently do not qualify for new car loans obtain credit to buy efficient vehicles. According to Lovins, the risk for this customer segment is similar to that for student loans with the additional benefit of the car serving as collateral. If the federal government guarantees reimbursement to current auto lenders for incremental defaults made to participants in the low-income scrappage program, the existing market mechanisms and financial institutions could be used for this program with little cost to the government.

Feebates*
Unlike tax rebates, feebates provide a direct signal of the value of efficiency to consumers where they pay the most attention – at the sticker price. A fee or a rebate is assigned to each individual vehicle type based on a fuel economy benchmark set annually for each vehicle size class. Buyers of more efficient vehicles receive a rebate; buyers of less efficient vehicles pay a fee. Feebates should be designed to be revenue, technology and vehicle size neutral in order to preserve customer choice.

Although customers receive the rebate for efficient vehicles, manufacturers will want to make the price of their vehicles more attractive by increasing the efficiency of their vehicles for less than the cost of the rebate. Eventually feebates could make corporate average fuel economy standards and the gas guzzler tax irrelevant, but the standards should be kept in the short-term to prevent backsliding.

While not specifically designed to help low-income drivers, feebates may lower the cost of some cars to an accessible point for them, and over time feebates will lead to a more efficient used-car fleet. In addition, feebates could help lower the costs of the low-income scrap-and-replace program. Feebates will also help small business owners purchase more efficient vehicles and save on fuel costs.

As an additional incentive for early adopters of the most efficient automobiles, single occupant hybrids should be allowed in high occupancy vehicle (HOV) lanes. While advanced vehicles remain a limited portion of the market, this would further stimulate purchase and use of efficient hybrid vehicles.

Replacement tire standards
Under federal fuel-economy standards, automakers equip new vehicles with tires that have a lower rolling resistance, which leads to higher fuel efficiency. By requiring replacement tires to be as efficient as new car tires, gasoline savings would begin immediately, saving over 7 billion barrels of oil over the next 50 years. This savings would help lower-income drivers in particular because they are more likely to drive used cars with replacement tires.

"Low rolling resistance tires" cost consumers only $5 to $12 more than conventional tires. But within a year, the average driver would recover the additional cost of the more efficient tires, and over the 50,000-mile life of the tires, the typical driver would see a return of $50 to $150. California has already established standards for tire efficiency and labeling that have encouraged consumers to purchase the most efficient tires.

Car-sharing
Recognizing that the average U.S. private car sits idle 96 percent of the time, car-sharing programs could decrease annual driving without loss of convenience. Pioneered in Europe and introduced in the United States by Zipcar and Flexcar, car-sharing programs provide participants with access to cars in their neighborhood for short-term rental. Zipcar claims that each of their cars replaces 7 to 10 privately owned cars. The most successful programs have occurred in urban areas with good public transportation, but with some adjustments car-sharing could be adapted for suburban areas. Further integrating the service with public transportation and emergency cashless taxi service could meet the transportation needs of a wide range of citizens. For example, here in Washington, DC, Metro's smart card could be adapted to access Zipcar's vehicles and pay for taxis in emergencies.

Car-sharing could be another option in a low-income scrap-and-replace program. Qualifying low-income drivers would receive help from the government to cover their costs in an existing private car-sharing program. This public-private partnership would encourage the expansion and development of new car-sharing programs and the added volume of users would lower costs for drivers paying the full cost of the service. Small business owners could save money by giving up their fleets for car-sharing programs.

Ultimately, super-efficient vehicles and affordable, renewable domestic fuels will have to meet our transportation needs. To get there from here, we need to take actions to foster innovation in the automobile industry, increase the use of biofuels, and invest in the research and development of technology that will lead to breakthroughs beyond our imagination.

Tapping Innovation
While current technology can help us start saving oil now, super-efficient vehicles eventually need to meet the needs of the automobile market. Innovation in the automobile sector will help maintain a domestic manufacturing base and provide good jobs for the future in the automobile sector and beyond.

A feebate program will help, but other incentives are also needed to jump start this shift. Tax credits to convert auto plants to produce more efficient vehicles are one alternative. Another is to create an x-prize style program to promote cars of the future whereby the government would offer a cash prize for the first company that develops and sells one million vehicles that achieve efficiency of at least 80 miles per gallon. A smaller prize would go to the second place finisher. An additional reward for the winners could be a guaranteed federal procurement for the federal fleet and low-income leasing program, if that program was adopted.

Grow our own fuel
More efficient vehicles powered by a higher percentage of biofuels will take us a long way down the road to energy independence. A broad coalition of business, labor, environmental groups, farmers, and policy officials has embraced a robust commitment to domestic biofuels research and deployment as a cornerstone element of a plan to reduce dependence on oil and curb carbon emissions. Conversion of crops and agricultural waste to fuel would provide a double dividend to farmers and boost rural economies, while providing the country with an immediate, domestically sustainable, low-carbon fuel alternative to oil. Helping cellulosic sources reach the market will provide biofuel opportunities across the nation, not just in the traditional Midwestern ethanol stronghold.

The private sector is already beginning to demonstrate the potential for widespread use of bio-products, but government must play a leading role in hastening these investments and minimizing risk. The federal government could jump start biofuels production by requiring annual increases in the amount of gasoline used from cellulosic biofuels. A well designed program would allow flexibility so that each region of the country could use material that makes the most economic sense and reward regions that deploy breakthrough technologies. In addition, the government should launch a one-time competition aimed at building five to 10 commercial-scale biofuel demonstration plants over the next five years and spurring investment to decrease the costs of commercial-scale plants.

The federal government should also gradually shift subsidies from agricultural exports to develop and deploy cellulosic-derived biofuels as cleaner, domestic alternatives to oil. Shifting current agricultural subsidies from export commodities to domestic bioenergy crops could serve as a major incentive to reduce carbon dioxide emissions, while stimulating economic growth in America's rural areas. Congress should identify and take immediate steps to begin shifting these subsidies during the next reauthorization of the farm bill.

A single standard for clean fuel
Currently there is a patchwork of fuel standards that vary by state. Progressives should support a streamlined approach that requires the cleanest gasoline blend be used nationwide. This would help minimize strain on refining capacity and buffer gasoline prices, and it would have the added benefit of improving air quality across the country.

Reducing our dependence on oil must be a national budget priority. Investment in reducing oil consumption now will save the government and consumers money in the long run.

There are existing tax incentives that actually increase oil consumption. These should be eliminated and funds redirected, starting with the $25,000 tax credit for the heaviest SUVs. This would save the Treasury almost $250 million annually and help cover the costs of other programs to help reduce oil consumption.

Most of the near-term policies proposed here, however, could be designed to be nearly revenue neutral. In addition to saving the federal Treasury money by increasing the fuel efficiency of the government fleet, they could increase access to affordable, reliable transportation, which in turn would expand job opportunities for many workers and spur economic development.

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How do feebates work?

Feebates assess a rebate or fee on the sale price of a new vehicle and are reflected immediately in the sticker price. Buyers who purchase fuel-efficient vehicles will see a rebate, while purchasers of less-efficient vehicles will pay a fee. Feebates are based on a "pivot point"-a level at which more efficient vehicles are eligible for a rebate, and less efficient ones a fee.

Take, for example, a pivot point of 24 miles per gallon (mpg). A vehicle that gets more than 24 mpg will be eligible for a rebate, while a vehicle falling below that level will be assessed a fee.

How will this work in reality? As an example, assume a feebate of $1,000 per 0.01 gallons per mile (gpm, the inverse measurement of mpg) above or below the "pivot." Using a "pivot point" of 24 mpg, or 0.0417 gpm:

  • A 6-cylinder Toyota Camry getting 23 mpg, which equals 0.0435 gpm, would be 0.0018 gpm above the pivot, meaning that the Camry would be assessed a fee of $180.
  • A Toyota Prius getting 55 mpg, or 0.0182 gpm, would be 0.0235 gpm below the pivot, meaning that the buyer would receive a rebate of $2,350.

How will this affect the final sticker prices of the two cars? A standard 6-cylinder Toyota Camry has a retail price of $22,530. Adding $180, the final price of the Camry would be $22,710. The Prius has a retail price of $20,975, meaning that after the $2,350 rebate, its final cost would fall to $18,625, costing $4,085 less than the Camry.

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