Keith Lutrel breaks it down further: As a trucker, he’s always thinking about the ripple effects on the costs of the goods that his company hauls. “When gas is $5 at the pump, that $2 Snickers bar is going to cost $5. That $5 loaf of bread is going to be $10.”
Blow those individual and small-business decisions up to the size of the whole economy, and you’ve got the makings of another recession, says James Hamilton, an energy economist at the University of California (San Diego). Hamilton is the author of a study noting that 10 of the 11 recessions in the United States since World War II were associated with a surge in oil prices. The most recent downturn occurred in 2008, when a spike in oil prices that summer was one of the causes of the economic crash that came later that year.
“Those long-run forces that sent us into record-high prices in 2008 are still there,” Hamilton says. “We could well see a replay of that in years to come.” If prices hit historic highs (which Hamilton says is likely), it will curb consumer spending, send up the price of everything from bread to plastic, and put a freeze on long-term investments and decision-making.
That, in turn, will start the Space Mountain effect anew, McNally notes. “If ratcheting-up oil prices contribute to recession, it will cause demand for oil to evaporate, and prices will crash again; we’ll be in a constant cycle of boom-bust.”
EYES ON A PRIZE
The facts on the ground in Bakersfield—that its oil production doesn’t have any meaningful effect on gasoline prices—seem to be lost in translation in Washington. Bakersfield’s member of Congress to be one of the most powerful men in the House, Kevin McCarthy, the majority whip. Like most Republicans, McCarthy, who heads the House Energy Action Team, regularly berates President Obama over his energy policies and argues that more drilling will help keep fuel prices low. With his silver pompadour and bright smile, he’s a featured player on Fox News Channel.
Still, in an interview, McCarthy agreed that his district, and the country, are in thrall to a global market over which we have no control. “We watch the price go up and down…. The economy is growing, but the fast rise in oil prices can slow it and stop it and reverse it, and we can’t control it,” he says. “And I’m worried when anybody has control to affect what we’re doing.”
McCarthy says that the U.S. should go back to producing as much oil as it consumes. “I think it’s possible to do that,” he maintains.
Many economists disagree, because the United States consumes so much oil; 1947 was the last time that the nation pumped as much as it used. And even when the U.S. reached its peak oil production in 1970, when we produced 3.5 billion barrels—that didn’t come close to the 6.9 billion barrels we are consuming today. To get to the point where we produce as much as we use, wouldn’t we also have to reduce how much we use?
“Absolutely,” McCarthy says. “You always want to be more efficient.”
But he won’t consider the one tool that Levi, McNally, and a long list of other prominent economic thinkers across the political spectrum say is the best, most efficient means to reduce demand: higher taxes on gasoline. The principle is simple: Raising the price of the commodity drives the market to use less of it. Think cigarettes.
“A gasoline tax when you’re paying $4.20 a gallon? No,” McCarthy snorts. “I don’t believe in government policy as punishment.” Nor does he support the higher fuel-economy standards set by the Environmental Protection Agency that require automakers to build cars with a fleet average of 55 mpg by 2025.
“You don’t need a punishment,” he stresses. “You need a reward. By punishing, you’re the bully on the playground.”
McCarthy argues that alternative-energy sources will ultimately reduce demand. “We have a lot of different resources; right outside my district there’s nuclear and wind, as well as oil.”
That doesn’t have much to do with the price of gasoline, however. Nuclear power and wind power generate electricity, not fuel for cars. But McCarthy says that only the private sector, not the government, can come up with a solution. “Why did Lindbergh fly across the Atlantic? For a prize.… What if the government, instead of punishing with [corporate average fuel economy] standards and high fuel prices, created a prize? And then when someone wins it, you have a ticker-tape parade,” he says. “I watched JFK when he said, ‘Let’s go to the moon’; we set a goal and achieved it. My philosophy is always rewarding, not punishing.”
Hathaway, who defines himself as a political independent and who plans to vote for Romney, breaks with McCarthy on the issue of gas taxes. “The best way to help our situation is to curb demand,” Hathaway says. “And a tax is the best way to do it. I have no impact on the price of gas, but the price of gas impacts the economy. We’re all in the same boat, so that, to me, is the more logical solution.”