Analyzing the McCain Gas-Tax Holiday Plan

Sen. John McCain has proposed a gas-tax holiday for the summer driving season. Paul Roberts, author of The End of Oil, speaks with John Ydstie about whether such a short-term tax cut would help the economy, trim oil prices, drive up demand for oil, or encourage the development of more renewable fuel sources.

JOHN YDSTIE, host:

This is WEEKEND EDITION from NPR News. I'm John Ydstie.

Coming up, Washington state's ferry system is getting creaky. But first: As part of his broader economic plan, Senator John McCain has proposed suspending the federal gasoline tax from Memorial Day through Labor Day to help ease the impact of soaring fuel prices. The idea has received mixed reviews.

Paul Roberts is author of "The End of Oil." He joins us from member station KUOW in Seattle. Welcome to the program.

Mr. PAUL ROBERTS (Author, "The End of Oil"): Good to be here.

YDSTIE: So gasoline is hovering around $3.50 a gallon for regular. Would dropping the federal gas tax - 18.4 cents a gallon on gasoline, 24.4 on diesel - bring prices down, or are there other factors that are going to complicate that?

Mr. ROBERTS: Well, on paper it certainly would, but, you know, the fact is as soon as something gets cheaper, consumers tend to use more of it. In terms of the actual sort of fiscal effect, this is tiny. It's like 5 percent.

YDSTIE: Well, are there other ways to relieve the pressure of high fuel prices on people who are hurt most? Who can least afford to pay these prices?

Mr. ROBERTS: Keep in mind that, you know, there have been proposals to give a gas-tax holiday for years. This comes up every time fuel prices spike. There's nothing you can do, really, in the short term to give people price relief. That is kind of a market-based mechanism.

You could give rebates to poor people. You could find ways to give them direct tax credits. But in terms of a quick way to give people price relief, you know, you're probably better off encouraging people to inflate their tires to the proper air pressure, you know, and thereby increase their efficiency, their efficient operation. You're probably more likely to affect prices that way than you are by cutting an 18-cent-a-gallon tax.

YDSTIE: One of the things that a number of economists have suggested, including a former chairman of the Council of Economic Advisors under President Bush, is essentially raising gas taxes, and at least the signals to the market would be that you shouldn't be using so much of this precious resource, and we wouldn't be sending so much money to foreign producers. We would be sending them into the U.S. government's tax coffers. Is that the kind of proposal that you think makes sense?

Mr. ROBERTS: It's - absolutely. I mean, your whole tax policy should be based on encouraging the activities you want more of and discouraging the activities you want less of. In this case, we want less consumption of oil, and we want more research into alternatives to oil.

Imagine if after 9/11, when the country was in a very patriotic mood - and I think in a mood to shoulder sacrifice - imagine if President Bush had said look, you know, we need to be serious about reducing our need for oil because using so much foreign oil, importing so much oil has all these negative consequences. And I think he could have convinced people that we needed even a modest tax, maybe a tax that rose gradually over time.

And the advantage of putting a tax on fuel at that time would mean that even if we were paying today $3.50 a gallon, the money would have stayed here. We could've used the money to fund new technologies, improve our highway infrastructure, all kinds of positive, long-term beneficial investments instead of sending the money overseas.

Instead, what's happened is that we're paying $3.50 a gallon for gasoline, and almost all that increase is going to places like Iran and Russia, and the money's being used for projects that are not necessarily in our interests.

YDSTIE: What policies should we be thinking about for the long term?

Mr. ROBERTS: We need to really encourage not just one or two new technologies to replace, you know, the sort of oil-based internal combustion engine but a whole portfolio of them. And the reason we need to do a whole portfolio is that one or two or three of them are going to fail.

For all the focus that we have on ways to replace oil, we need to simply find ways to use less. I mean efficiency, conservation, is the single most effective way to improve your energy security, and yet as a policy area it's the one that we neglect, you know, most frequently.

This country has had no meaningful increase in fuel economy for more than two decades. You know, we're talking about it now, but again we're talking about rolling that improvement in fuel economy out over a number of years.

Until we get serious about reducing demand, we're going to be having these kinds of conversations every few years.

YDSTIE: Paul Roberts is the author of "The End of Oil." He spoke with us from member station KUOW in Seattle. Thanks very much.

Mr. ROBERTS: Thanks.

Copyright © 2008 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.

Gas Prices Continue Climbing

The cost of gas reached a new high on Tuesday, escalating to a national average of $3.51 per gallon — almost 66 cents higher than the price a year ago. The sharp rise has been driven, in part, by the increase in the cost of crude oil, now near $120, and the declining value of the dollar.

The sticker shock may not end soon. Here's a guide to what's going on at the pump.

What's driving up prices now?

The falling dollar, the transformation of commodity markets into financial markets and steady global demand for oil are all contributing factors, says Mark Zandi, chief economist for Moody's Economy.com and an economic adviser to Republican Sen. John McCain's presidential campaign.

"Given the turmoil in the credit markets, investors are turning to commodities and oil as a trading vehicle," Zandi explains. "It doesn't take a whole lot of money" flowing out of the bond or stock market and into oil or natural gas to drive up prices.

Typically during a recession in the United States, demand for oil falls because people make a conscious decision to drive less. But any decline in U.S. fuel consumption has been offset by greater demand for all kinds of fuel in emerging economies, which Zandi says are doing well and therefore contributing to the price escalation.

Strong global demand is likely to increase, not decrease, pressure on U.S. gas and oil prices. "China, India and other developing countries [that] are developing their economies –and a middle class — just keep putting more pressure on the supply of crude oil to turn into energy for themselves," says Jim Boyd, vice chairman of the California Energy Commission.

Is there any chance prices will fall soon?

No. Gas prices are rising quickly. At the beginning of the year, a gallon cost $3. Analysts and economists view the rise to more than $3.50 as a step along the way to prices that may exceed $4.

Is any relief coming?

Last week in Congress, Sen. John McCain proposed suspending the federal gas tax between Memorial Day and Labor Day this year as a measure of relief for consumers during the height of the driving season. The federal tax is 18.4 cents per gallon of gas and 24.4 cents per gallon of diesel.

The question to ask about such plans, says Billy Pizer, an economist with the Washington, D.C., think tank Resources for the Future, is how much of the money will flow into the hands of consumers versus corporations.

Some economists say that suspending the tax will only promote greater consumption and drive prices up — sending more money to oil producers, not consumers.

Are Americans feeling particularly squeezed because oil is priced in dollars and our currency is weak?

Zandi says the downturn in the U.S. economy, which he believes is in a recession, is taking a toll in a variety of ways.

"Nothing is going right for consumers in particular," says Zandi. "We're losing jobs, the stock market is down. House prices are falling. Gas and food prices are rising. It's all very debilitating, so the higher gas prices hurt more in that kind of context."

Will prices drop once the summer driving season ends?

After summer, gas prices typically do fall — but it depends on the price of crude oil, economists say. In the fall, the problem may shift – especially for consumers in colder U.S. regions —to increased costs for heating homes.

The Southeast, with a larger concentration of lower-income households, is typically hardest hit by rising gas and oil prices because residents spend proportionately more on energy, says Zandi.

Will we ever return to gas at $2 a gallon?

It's unlikely, especially in the near term.

"Every penny increase in the gasoline costs the American consumer $1 billion annually," says Zandi. "If we go from $3 to $4 that means $100 billion in extra cost."

Will the current pricing scenario hasten the use and development of new fuels and vehicles?

As more consumers feel pinched at the pump, their discomfort may spark individual and corporate action. "High prices in the market create responses on both the supply and demand side for fuel," says Pizer. This translates into consumers trying to save gas by driving less or searching for cars with higher fuel economy, he says. On the supply side, companies may turn to conventional sources for fuel that were not profitable in the past because they were difficult to obtain, unconventional sources that may have higher production costs or alternative fuels, he explains.

"I do feel sorry for the American consumer," says Boyd. "We've predicated our lifestyle on almost the God-given right to cheap gasoline. It's a rude awakening — a permanent awakening — we've got to have a mixed portfolio of transportation fuels. And we have to have more efficient motor vehicles."

Why are gas prices higher in California?

Since the early 1990s, to comply with federal law and its own stringent air quality standards, California has produced and utilized a different blend of gas that is more costly to produce. On Tuesday, the California retail price was $3.86, according to the California Energy Commission — 35 cents higher than the national average. Boyd attributes a third of the price difference to production costs. The remainder, he says, is because demand exceeds supply.

Material from The Associated Press was used in this report.

Related NPR Stories

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.