Gas, ad nauseam

For my money, Jim Glassman has the best take-down on this “price-gouging” mumbo-jumbo being spouted by the President and Republican leadership in Congress. As for my own two-cents, they quite simply know better. Or should.

Glassman starts by upbraiding the President: With gasoline prices close to $3 a gallon, President Bush this morning gave a disingenuous speech to an alternative fuels association about what he was going to do to stem the rising tide. There were a few flashes of candor and insight, but, on the whole, it was a sad example of political capitulation by a former Texas oilman who certainly knows better.

Included is a fine drive-by on the nonsense we read from Denny Hastert and Bill Frist: The President -- and I am not even mentioning the claptrap one hears from Speaker Denny Hastert, Senate Majority Leader Bill Frist and Judiciary Chairman Arlen Specter -- is now using the lexicon of extreme environmentalists and statists. Again, he knows better.

The meat of the argument however is persuasive, in my view at least. It’s big-picture stuff but easy to understand and follow. Considering that Bush is a former oil executive, it’s hard to understand the reticence he obviously has to speak and act plainly to do what he knows is right and, more importantly, effective:

It is fossil fuels that are helping to raise people out of poverty in India and China, fossil fuels that have helped the world economy to grow by 4.5 percent last year, its fastest rate in history. If forced to assign some kind of moral value to oil and gas, I would say they are good, not bad. But why moral language at all?

After talking about addiction, the President said he was going to crack down on price gouging -- that old bugaboo. He said he had asked the Justice and Energy departments to find out whether the rising price of gas was partly the result of manipulation. This is absurd. The gasoline market is broad, fragmented and highly competitive. Price gouging has been studied many times, to no effect. Gas prices are rising because crude oil prices are rising.

All Bush has to do is read Chapter 11 of his own "Economic Report of the President," which concludes, first, that "the prices that consumers...pay for gasoline depend heavily on the prices that petroleum refiners pay for crude oil," and, second, that "crude oil prices have risen steadily over the past several years due to growing world demand."

In addition, this has been a tough year for geopolitical risk -- which tends to boost oil prices in the futures markets. Chad, Iran, Iraq, Nigeria, Venezuela -- all have been subject to real or potential supply disruptions. And the Persian Gulf remains a dangerous place.

Next, the President chided the companies that actually produce the energy. "We expect there to be strong re-investment [of] cash flows" in more energy production. Just what does he think these companies have been doing? Over the past 10 years, the large integrated oil companies have made capital expenditures roughly equal to their net earnings. In fact, between 1991 and 2005, ExxonMobil's cumulative capital and exploration expenditures (some $210 billion) actually exceeded the company's earnings. Chevron spent $11 billion last year alone.

If politicians truly want oil companies to invest in drilling and refineries, the best tactic is to recognize that these firms are not villains. Gosh, maybe they're even heroes.

The President also talked about salvation through hybrids. These cars earn a $3,400 tax credit now, but there's a ceiling on the number of vehicles to which the credit applies. He wants the limit removed.

Hybrids are a terrific idea, but currently they are expensive to build. The typical hybrid, even with a tax credit and even with $3 a gallon gas, is still uneconomic compared with a conventional gasoline-powered car. But the way to drive down the cost of hybrids is not through more tax credits. Those credits dampen the incentive to close the cost gap.

President Bush lived and worked in the oil patch. He knows very well that oil is a commodity whose price moves up and down with global changes in supply and demand -- movements that we can't affect all that much. What we can do is remove political obstacles to a well-functioning market. Such steps would increase supply and lower prices. But we shouldn't kid ourselves. The rising oil price is affected by geopolitical threats, but it is mainly the result of increased demand, which itself is the result of rising standards of living -- which are a lot better than the alternative.

I really am losing patience with this nonsense. There is no good reason for the President and Congressional leadership to cower when it comes to gas prices. The economics are on their side. All they have to do is make the argument.