Now that the price of petroleum has hit an all-time high of $83 per barrel, the Wall Street Journal is anticipating the impact of $100-per-barrel oil. Many analysts believe that tight supplies, a weaker dollar and continued demand growth — China, India and other developing countries are reaching a stage where millions of people can afford automobiles — will conspire to push oil prices for Americans ever higher.
A front-page article in today’s Journal notes that the United States economy could probably survive record prices better than in the oil price shock of the 1970s because “U.S. households today spend less than 4% of their disposable income at the pump, vs. over 6% in 1980.”
I’m not one of those Jeremiahs who believe higher oil prices will spell untold disaster. The beauty of a market economy is that it is adaptable. As long as we don’t enact counterproductive, Jimmy Carter-era price controls and “excess profits” taxes on oil companies — something we cannot take for granted with our current Congress, alas — higher prices will create incentives for businesses and consumers to conserve energy use, spur the oil giants to extract oil in locations once considered uneconomical, and encourage entrepreneurs to develop renewable fuels and other alternatives.
But there is no gainsaying the fact that $100 oil will hurt. In 2004, the last year tracked by the Virginia Department of Motor Vehicles, Virginians consumed 5.2 billion gallons of gasoline. If the price of petroleum increases another 25 percent, that would translate into a roughly 50-cent hike in the price of gasoline and a $2.6 billion hit to Virginians’ pocketbooks. The impact on Virginia would be harder, I might add, than on the U.S. as a whole because Virginians consume more gasoline per capita.
There are two ways for Virginians to respond. One is to drive more fuel-efficient automobiles. The other is to drive less. But “driving less” is only a theoretical option when Virginians live and work in scattered, disconnected, low-density regions with limited shared-ridership services.
As I argued in “Measuring Prosperity,” the ultimate goal of public policy in Virginia should be to raise Virginians’ living standards and quality of life. Indeed, because of the progressive nature of the federal income tax code, lowering the cost of living can be a more cost efficient of boosting living standards than engineering higher incomes. If public policy helps raise incomes by $1, the federal government takes as much of $.40, depending on an individual’s tax bracket. By contrast, if public policy reduces living costs by $1, the savings is not counted as income, it’s not taxed, and the taxpayer enjoys the full benefit.
I find it remarkable that fiscal conservatives who berate the federal government for excessive taxation fail to make the connection to public policy on the state and local level. Business-As-Usual governance practices have given us auto-centric human settlement patterns that result in people driving greater distances, burning more gasoline, polluting more, adding more to congestion — and enriching Uncle Sam. Achieving Fundamental Change in human settlement patterns would seem to be in the best interest of everyone except those with a financial stake in maintaining the status quo. There’s no time like now to start enacting Fundamental Change!
(Ritual disclaimer: I do not, not, not, repeat NOT, support social engineering. I do NOT advocate forcing people to live in townhouses or ride the bus. I advocate (a) making people pay the full locational costs of where they live and work, (b) reforming zoning codes and comprehensive plans to allow developers more freedom to build the kinds of communities that people want to live in, (c) giving entrepreneurs more latitude to provide market-based transportation and energy solutions, and (d) maximizing the array of choices available to consumers. The result, I believe, will be more energy-efficient transportation systems and human settlement patterns.)