Is a gas price floor a good idea?

May 28, 2008
Op-Ed Columnist
Truth or Consequences
By THOMAS L. FRIEDMAN

Imagine for a minute, just a minute, that someone running for president was able to actually tell the truth, the real truth, to the American people about what would be the best — I mean really the best — energy policy for the long-term economic health and security of our country. I realize this is a fantasy, but play along with me for a minute. What would this mythical, totally imaginary, truth-telling candidate say?

For starters, he or she would explain that there is no short-term fix for gasoline prices. Prices are what they are as a result of rising global oil demand from India, China and a rapidly growing Middle East on top of our own increasing consumption, a shortage of “sweet” crude that is used for the diesel fuel that Europe is highly dependent upon and our own neglect of effective energy policy for 30 years.

Cynical ideas, like the McCain-Clinton summertime gas-tax holiday, would only make the problem worse, and reckless initiatives like the Chrysler-Dodge-Jeep offer to subsidize gasoline for three years for people who buy its gas guzzlers are the moral equivalent of tobacco companies offering discounted cigarettes to teenagers.

I can’t say it better than my friend Tim Shriver, the chairman of Special Olympics, did in a Memorial Day essay in The Washington Post: “So Dodge wants to sell you a car you don’t really want to buy, that is not fuel-efficient, will further damage our environment, and will further subsidize oil states, some of which are on the other side of the wars we’re currently fighting. ... The planet be damned, the troops be forgotten, the economy be ignored: buy a Dodge.”

No, our mythical candidate would say the long-term answer is to go exactly the other way: guarantee people a high price of gasoline — forever.

This candidate would note that $4-a-gallon gasoline is really starting to impact driving behavior and buying behavior in way that $3-a-gallon gas did not. The first time we got such a strong price signal, after the 1973 oil shock, we responded as a country by demanding and producing more fuel-efficient cars. But as soon as oil prices started falling in the late 1980s and early 1990s, we let Detroit get us readdicted to gas guzzlers, and the price steadily crept back up to where it is today.

We must not make that mistake again. Therefore, what our mythical candidate would be proposing, argues the energy economist Philip Verleger Jr., is a “price floor” for gasoline: $4 a gallon for regular unleaded, which is still half the going rate in Europe today. Washington would declare that it would never let the price fall below that level. If it does, it would increase the federal gasoline tax on a monthly basis to make up the difference between the pump price and the market price.

To ease the burden on the less well-off, “anyone earning under $80,000 a year would be compensated with a reduction in the payroll taxes,” said Verleger. Or, he suggested, the government could use the gasoline tax to buy back gas guzzlers from the public and “crush them.”

But the message going forward to every car buyer and carmaker would be this: The price of gasoline is never going back down. Therefore, if you buy a big gas guzzler today, you are locking yourself into perpetually high gasoline bills. You are buying a pig that will eat you out of house and home. At the same time, if you, a manufacturer, continue building fleets of nonhybrid gas guzzlers, you are condemning yourself, your employees and shareholders to oblivion.

What a cruel thing for a candidate to say? I disagree. Every decade we look back and say: “If only we had done the right thing then, we would be in a different position today.”

But no politician dared to do so. When gasoline was $2 a gallon, the government never would have imposed a $2 tax. Now that it is $4 a gallon, the government should at least keep it there, since it is really having the right effect.

I was visiting my local Toyota dealer in Bethesda, Md., last week to trade in one hybrid car for another. There is now a two-month wait to buy a Prius, which gets close to 50 miles per gallon. The dealer told me I was lucky. My hybrid was going up in value every day, so I didn’t have to worry about waiting a while for my new car. But if it were not a hybrid, he said, he would deduct each day $200 from the trade-in price for every $1-a-barrel increase in the OPEC price of crude oil. When I saw the rows and rows of unsold S.U.V.’s parked in his lot, I understood why.

We need to make a structural shift in our energy economy. Ultimately, we need to move our entire fleet to plug-in electric cars. The only way to get from here to there is to start now with a price signal that will force the change.

Barack Obama had the courage to tell voters that the McCain-Clinton summer gas-giveaway plan was a fraud. Wouldn’t it be amazing if he took the next step and put the right plan before the American people? Wouldn’t that just be amazing?

I expected better from the author of The World is Flat.

1) It further disrupts the activities of the free market for gasoline and automobiles
2) It is a direct transfer of wealth to the gov. (or, more likely, will encourage the oil companies to keep prices artificially high)
3) Is a poor model - the gov should use carrots (tax incentives) to promote change, not sticks (taxes)
4) What makes him think perpetual $4 gas would keep companies like Dodge from offering incentives similar to the one being offered now? This plan would not be effective in deterring "unethical" behavior (I take issue with that as well, but I'll let it go).
5) Such a measure would also limit GDP growth, as transportation is one of the key competitive advantages that allows our economy to grow. I suspect the consequences of such a price floor would be much farther reaching than anticipated.