Pump Pundit

Pump Pundit

U.C. energy expert Severin Borenstein says bring on the gas tax.

As we dive headfirst into the so-called “summer driving season” the reality of $4-a-gallon gas may seem like karmic payback for trying to build a democracy from scratch in the Middle East. But, the hard, cold truth comes down to the ancient law of supply and demand—there’s a huge demand (thanks China and India) and a limited supply. Ergo, prices go up. While this might not bode well for that long-planned jaunt in the Forester to Nova Scotia this summer, there’s at least one energy expert who’d like to see prices double what they are now. Severin Borenstein, director of U.C.’s energy institute and a prominent media go-to guy on energy issues, explains how his plan would work and what it would mean for the average American raised on cheap, plentiful oil. I talked to Borenstein on his Bluetooth as he tooled around in his hybrid.

Paul Kilduff: Every time we have a spike in gas prices you hear energy wonks say it’s a good thing because it will put us behind the wheels of more fuel-efficient cars. What do you say?

Severin Borenstein: I’d much rather see $4 gasoline because the money is going to the federal treasury than because it’s going overseas. So I think this is not the way we should be getting $4 gasoline. I think we should actually have a very high tax on oil use in general, not just gasoline, and that would yield high gasoline prices. We would then be able to offset it, because we’d be getting revenue, by reducing payroll taxes or lowering low-income income taxes in ways that would compensate particularly the neediest people.

PK: Almost like a flat tax that everyone would have to pay at the pump?

SB: I wouldn’t say it’s like a flat tax, but it would be a tax because we would offset the regressivity of an oil tax by making the income tax more progressive.

PK: What do we pay in gas taxes now and what would you like to see?

SB: We pay about 50 cents a gallon. It’s really pretty minor. I think that if we’re talking about really changing behavior I would say a gradual ramp-up to European-level taxes, which would mean gasoline would cost $7 or $8 a gallon.

PK: Ouchy.

SB: Before people get shocked at that they gotta realize we don’t have oil and we’re using it and the money is going to places, many of which are unfriendly to the United States. If people think that’s drastic, it’s not nearly as drastic as a lot of other things that could happen if we keep doing what we’re doing.

PK: So if we were to pay $8 bucks a gallon, how much of that would be tax?

SB: Well over half. I mean basically right now the untaxed price of gasoline is a little over $3 a gallon and the rest would be tax. It would gradually have a small effect on the price of oil but we’d be kidding ourselves if we thought that suddenly the price of oil would drastically drop because the United States raised gas taxes. It wouldn’t have a very immediate impact.

PK: How much of my $4-a-gallon goes to Osama Bin Laden’s security detail?

SB: That’s not the right question. When you buy gas you purchase from the world oil market. All demand in the world oil market drives up the price of oil. It doesn’t matter whether our oil is coming from Venezuela or Texas or Norway or Saudi Arabia—the price of all of it goes up when you buy gasoline. You are part of world demand. So this focus on where we get our oil from is just complete nonsense.

PK: But you just made the point that we’re buying oil from countries that are unfriendly to the U.S.?

SB: It’s not that we’re buying oil, we are transferring wealth to those countries and whether we buy oil from Saudi Arabia directly is irrelevant, or Iran directly, is irrelevant. The fact is the very strong demand for oil and gasoline is determining the price. There are two distinct problems—besides the environmental and “gas just costs too much”—where people are often confused. One is the geopolitics, this idea that it’s strengthening hostile governments. And that’s a serious problem. The other is the macroeconomic instability. The fact that our economy is so vulnerable to movements in oil prices. And those are different challenges. If we were to ramp up our gas tax it would immediately affect the macroeconomic instability problem because there’d be a fairly rapid movement away from this high dependence on oil products. It would only have a gradual effect on the geopolitics of the world’s oil market.

PK: So, to get this through my thick skull, you’re saying . . .

SB: A higher gas tax would fairly quickly move us to other energy sources and make the U.S. economy less vulnerable to oil price shocks. It would gradually affect the world price of oil and reduce the great wealth transfer that’s going into some countries that are hostile to the United States.

PK: This would take some time.

SB: The latter, the geopolitical effect, would take time. The movement away from gasoline, I think, would actually happen pretty quickly. It is already. I mean we’re seeing a change in the mileage of cars people drive. I think we have a number of technological opportunities out there but they’re just not quite making it at $4 a gallon. At $7 or $8 they would.

PK: So $4-a-gallon still isn’t enough of a disincentive for American gas hogs hell-bent on buying Cadillac Escalades?

SB: It is discouraging people but it’s sort of a very incremental change and we’re not seeing major technological changes.

PK: Isn’t what you’re advocating political suicide for any candidate?

SB: Yes. But that’s not the problem. The problem is not the politicians. The problem is the voters. The problem is that the voters continue to live in this fantasy that we have a right to unlimited quantities of oil at a price we get to deem reasonable. And there’s nothing more reasonable about $30-a-barrel for oil than $100-a-barrel for oil. It’s all supply and demand. And it’s their oil and I think it’s downright un-American to think that they have a responsibility to sell us their property at a price we get to choose. But that is the prevailing view. McCain’s announcement this morning that he wants to lower gasoline taxes, which is just pure politics, is just feeding the same notion that you have a right to “reasonably priced” gasoline. And you don’t. There are only two ways that we’re going to get an energy plan. One is to actually move away from oil. The other is to invade and colonize the Middle East—we’re not doing it yet although there’s no question we took a first baby step towards it and that’s pretty scary. I think if you actually said, “Let’s invade and colonize the Middle East,” most people would not support that.

PK: Unless we wanted to become a suburb of China or Dubai since they’re the ones we’ve been borrowing the money to pay for these forays. What is the answer to weaning America off oil? A plug-in hybrid that I power with electricity generated from solar panels on my roof?

SB: No, that’s definitely not the answer right now.

PK: Why not?

SB: Because solar power is extremely expensive. If you want renewable energy—we have switched topics—solar photovoltaics [solar PV] are the least cost-effective way to do it. Wind power, geo-thermal, solar thermal (big plants out in the desert), all beat solar PV by a lot. But we do have to move towards a more energy-efficient economy as well. Just replacing the energy with renewable sources is actually using the energy more efficiently. The folks at U.C. Davis’ Institute of Transportation Studies did a report that said that if we build the same weight and horse-power vehicles we drove in 1980 we’d be using 35 percent less gasoline. So, basically there’s been no fuel economy change in the last 20 years.

PK: So you’re advocating for more fuel-efficient vehicles—bring back my Toyota Tercel. It was so manly (but not as cool as my first car—a 1972 Chevy Malibu, otherwise known as “the living room on wheels”).

SB: Yes, that is definitely part of the solution. And people have been told instead: “gas is cheap, drive that 6,000-pound SUV if you want.” Basically, we’ve taken the technological improvements in vehicles in the last 25 years to make faster, heavier toys instead of to make more practical fuel-efficient cars.

PK: So, it sounds like you’re pointing the finger squarely at the American public. Are we just fat and lazy?

SB: Yes. We are unwilling to accept the reality that oil is not a cheap good in plentiful supply and the politicians are just feeding that view, for the most part, because you’re right, it is suicide to say we have to change the way we use oil. Now George Bush said it but there were no teeth behind it. If there were actually teeth behind it—that is to now try to move off of using oil—he would be even more unpopular. And McCain’s announcement today is going in the opposite direction. It’s sort of reinforcing this view that you have a right to cheap, plentiful gasoline.

PK: If you go to Europe and elsewhere around the world you see all the so-called mini-cars. The Smart car notwithstanding, why won’t auto companies sell these cars in America? Is it just that there’s no demand?

SB: Americans used to buy those cars. In the 1990s they started buying the giant cars and the reason was gas was cheap. Although we’re much richer now than we were in 1990, $3 or $4 gasoline is not going to move us back to really compact cars, but we have to start recognizing that oil is in short supply. It costs a lot. It really costs a lot. This isn’t some conspiracy of the oil companies, and beating up on U.S. oil companies for the high price of oil is just political nonsense.

PK: But what about the argument that Americans have a lot of crap to haul around—like jet skis and snowboards—so they need big honking SUVs?

SB: That’s why we buy big SUVs. And if the price of gasoline were $8-a-gallon we would move to a different way of living.

PK: So, you don’t make changes unless you’re forced to?

SB: Yeah and what a shame. And Tom Friedman’s point is that we’re paying an oil tax, we’re just paying it to oil-producing countries instead of paying it to the federal treasury.

PK: What do you drive?

SB: A Honda Insight. And, you won’t be terribly surprised, with a personalized license plate that says “Tax Gas.” I just got it six months ago. Turns out nobody else had taken it. What a surprise.

PK: How much does the fact that we in California haven’t built a new oil refinery since 1969 play a part in all of this?

SB: That’s part of the problem but it’s actually a fairly small part of the problem. Nationwide and even in California refining margins have been probably 10 cents higher on average over the whole year than they would have been if we’d had plentiful capacity. So, it’s not that the refining margins are the major piece of our high gasoline prices. Building more refineries would help although I think bringing demand down is a better solution than pushing supply up.

PK: I hear OPEC saying the same thing though—that America doesn’t have enough capacity.

SB: That’s OPEC basically trying to move the ball away from them, and the reality is that supply is very short relative to demand.

PK: Is it hypocritical for Californians to drive as much as we do and have this NIMBY attitude about drilling or refining for oil anywhere near this state?

SB: It’s completely hypocritical. It’s not that we drive more than the rest of the country, we sort of have about an average vehicle miles per capita for the U.S. But we do drive and yet we don’t want refineries near us. We don’t want to have anything to do with the oil process. But, to be realistic, drilling in California would not lower the price of gasoline. Drilling in the United States would not lower the price of gasoline. It’s a world oil market and that would put a little bit more oil into that world oil market but it would be a very tiny increment that would have a very tiny impact. That’s just oil company nonsense when they talk about how we have to drill for more oil because of the high price of gasoline. That’s just using this political situation as an excuse. I actually gave a talk two weeks ago to an oil industry conference where I said this: When you guys get up and claim that you are not responsible for the high price of oil, that it is set in the world market, you’re completely right. But you can’t get up and say that and then in the next sentence say we need those tax breaks in order to produce oil that will keep the price of gasoline down because your production isn’t what drives the price of gasoline (and you just said that). They didn’t like the second part of that.

PK: But what about all these record oil company profits?

SB: That’s just consumer whining. They owned oil when the price of oil went up so they made a lot of money. You owned a house and the price of the house went up so you made a lot of money. It’s exactly the same thing. They aren’t setting the price. Now, it’s a good argument for why we should not be giving them special tax breaks because those tax breaks aren’t lowering the price of oil, they’re just pouring money into shareholders’ pockets. As you can see by now I’m not particularly popular with either end of the political spectrum because both of them just sort of spew nonsense when the underlying goals just aren’t good public policy.

PK: But getting back to cars, say somebody does live in Benicia and they have to commute to Fremont every day.

SB: Poor them. They have to commute. They have no choice but to drive their 12-mile-a-gallon SUV 50 miles round trip?

PK: What do they do?

SB: They get a more fuel-efficient car now and then gradually they figure out how to live closer to where they work or work closer to where they live. It’s time to face up to the fact that oil really costs a lot and energy is really expensive and it’s really much more expensive than what you’re paying at the pump. You’re just not paying the full costs. If you paid the full costs it would be many dollars more per gallon at the pump. There’d be much more for your natural gas. It would be much more for your electricity, some of which comes from coal-fired power plants, even in California. So it’s not very politically popular but eventually we have to get to this recognition and if we get to it sooner it’ll be much less costly than if we wait.

PK: This is pretty sobering stuff. How does a politician get this point across to supposedly bitter, working-class, beer-drinking bowlers in the rust belt who’ve lost their factory jobs?

SB: What I’m saying to them is, “Look, I’m telling you the harsh economics of this. I’m not going to tell you how to get elected saying this. That’s not something I know how to do.” I have said this to people in two of the three campaigns—both of the Democratic campaigns—and the response is basically that’s not a politically viable message. And what I’ve taken away from that is we are much better off if energy and climate change does not become the central issue of this campaign because if they talk about it before November they’re just going to lock themselves into stupid policy. And McCain is starting it now. McCain’s advisers—I know the economists who are advising him—they know perfectly well that suspending the federal gas tax is a really bad idea. It’s politically beneficial, but as far as policy goes it’s just awful. It’s just pure bad judgment. My only hope is we’re not going to see a bandwagon where Obama now wants an even bigger move to help the ailing middle class. And by the way, when the President of the United States goes to some of these oil producing, underdeveloped countries and says you really got to give American consumers a break, it really doesn’t sell very well. American consumers are among the richest people in the world. Even the middle class by world standards are incredibly wealthy. And so telling people in other countries that they need to sell us oil more cheaply just doesn’t evoke a lot of sympathy.

PK: I agree with a lot of what you’re saying, but there are an awful lot of people with really big cars who live really far from where they work.

SB: Wait a second. They didn’t always drive those really big cars. They bought those big cars because gas was cheap and they didn’t always think they could live 75 miles away from where they worked. I grew up here. I was living in Berkeley and I had a summer job, part of which was in Tracy. And I would drive out there. I was a handyman at an apartment complex, and it was considered so far that they gave me an apartment to just sleep in overnight. And that was a counter-commute. And now people are commuting in from Tracy in the 580 traffic. And so norms have really changed and they have to change back because the life we’ve built around very high energy use was based on ever cheaper energy. Gasoline hit the lowest price it has ever been, adjusted for inflation, in 1999. And that’s why we have this lifestyle and the problem is it’s just not viable given where the oil’s coming from and given the world politics and given climate change. And so we need major technological breakthroughs. We should have been funding research and development for the last seven years at a high level instead of cutting it as has been happening, but we haven’t.

PK: What about hydrogen fuel cells?

SB: Hydrogen fuel cells are a great solution for 2040. But the people pushing it as something that we should be doing now or will be doing in the next decade are just blowing smoke and they know it. Everybody in the science community knows that hydrogen is not a solution. Hydrogen is not an energy source. Hydrogen is an energy storage technology. So you have to produce hydrogen. Right now they are producing hydrogen from fossil fuel–fired power plants for these hydrogen fuel cells. You only get to a hydrogen economy when you can produce it in some energy-efficient and environmentally benign way and we are decades away from that.

PK: What about the plug-in hybrid (not powered off my roof of pricey solar panels)?

SB: I think that’s a really good incremental step. It improves the fuel efficiency of cars. It’s a much better incremental step in a Prius than in a Chevy Tahoe. You’re not making real progress if you’re just responding to the better technology by driving bigger, heavier cars. You have to do both.

PK: I was disappointed to see that the Smart car only gets 32 miles per gallon.

SB: Yes, it’s sort of like the Mini.

PK: Shouldn’t it get 50?

SB: It should. But it’s basically built for fun and until you change tastes you don’t really get around that. Have you ever driven a Prius?

PK: I have.

SB: They’re not great fun to drive. And they’re not high-acceleration, muscle cars. But they get you from here to there. And until most people view transportation that way we’re going to have this problem. Because if we view it as a toy and it’s particularly valued for power and weight and size, then we don’t solve this problem.

PK: What about just pure electric cars?

SB: Well, the problem is the batteries. They’re still very expensive. If they make a breakthrough on battery technology that will really cause competition between biofuels and batteries, but the biofuel folks are still betting that batteries aren’t going to make any big improvement.


Suggestions? E-mail Paul Kilduff at PKilduff@sbcglobal.net.
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Age: 50 |  Astrological sign: Capricorn

Birthplace: Berkeley (Herrick Hospital)

First real job:
 Cooking fish at H. Salt Fish & Chips (which included repeatedly putting your batter-covered hand in 400-degree oil)

Favorite pizza topping:

Mideast peace plan: 
Hummus and halvah.

Faces of the East Bay