Will cheaper gas nix energy reforms?

If prices keep dropping, the next president may find it harder to ease the US off foreign oil.

By , Staff writer of The Christian Science Monitor

Jack MacDonald, a retired law enforcement officer, watched with bemusement – and some concern – as the Irving and Mobil gas stations on Route 1 in North Hampton, N.H., engaged in a bona fide price war this weekend.

All day Friday, their prices fell, both ending the day at $2.09 a gallon, not far off the national low of $1.93 at Casey's gas station in Altoona, Iowa, just outside Des Moines. Cars lined up seven deep at one pump. "It's a relief for us drivers," says Mr. MacDonald, a Democrat. "But it's suspicious that it's happening this close to Election Day. Who's controlling it, and why?"

Great questions. The factors behind the 50 percent price drop are myriad and complex, ranging from basic supply and demand to a renewed effort by oil-producing countries such as Saudi Arabia and Venezuela, perhaps in order to undercut calls by both presidential candidates for US energy independence within a decade.

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Does the low cost of flying, transporting goods, and getting to the store mean that the biggest incentive for energy reform is evaporating?

"Falling gas prices takes a lot of starch out of the political rhetoric," says Austin-based energy journalist Robert Bryce, author of "Gusher of Lies."

The candidates are taking notice. Last week, Alaska Gov. Sarah Palin, the Republican vice-presidential candidate, warned consumers in a speech to not let cheaper gasoline get in the way of Republican plans to ease the country off foreign oil. There are already signs that consumers, who boosted public transportation ridership by 9 percent in the past year, are returning to their former driving habits as they get price relief at the pump.

"The only reason we're talking about electric cars is because of the high price of oil," says Jorge Pinón, a 30-year oil industry veteran and now a senior fellow at the Center for Hemispheric Policy at the University of Miami. "Without the high price of oil, the economic development costs are not there. What I think is going to happen is we're all going to go back to driving the way we used to drive."

Impact on candidates energy plans

The price buildup last spring happened this way: Anticipated demand added a $20 premium per barrel; tight summer supplies boosted price; a weak dollar added anther $17 per barrel. A new phenomenon – hedge fund speculation in the global oil markets – added another $21 premium, says Mr. Pinon.

Now, with US oil consumption down 8 percent in the last year and global markets reeling in the wake of the credit meltdown, hedgers can't find collateral and have bailed on the market. The dollar is stronger, and OPEC, after increasing output by half a million barrels a day in June, is promising cuts. Sunoco this week mothballed one refinery because no one was buying the gas.

Low gasoline prices combined with the economic crisis "may lull candidates into a ... lack of immediacy of the [energy] problem," says a consumer marketing expert at Ohio State University in Columbus. "I hope that wouldn't happen because the fundamental nature of the problem is still the same as it was three weeks ago."

Most troubling for presidential contenders John McCain and Barack Obama is that low gas prices have a more pragmatic and immediate effect on consumers and the broader market than any government policy. Both candidates aim to shift the United States onto domestic energy sources, including coal and nuclear, that can fuel new-generation electric hybrid cars costing as little as 2 cents a mile to operate as compared to 10 cents a mile for the basic gasoline-driven car.

"If prices stay at this level, will GM delay the Volt again? Will Nissan delay its electric car? Will Chrysler delay an electric car?" asks Mr. Bryce in Austin. "The arbitrage between gas and electricity isn't necessarily as important with gas at $2 as it is at $4."

Watching the recent gasoline price drops, former CIA director Jim Woolsey, now a McCain energy adviser, says he is reminded of similar price-cutting tactics by Saudi Arabia and OPEC in the 1980s and 1990s in the face of US government attempts to ease dependence on foreign oil. Both candidates' plans pose a significant strategic threat to oil producers, he says, because they focus on tax breaks for hybrid and plug-in vehicles that would gradually move consumers from liquid fuels onto the national power grid.

"I don't think oil could get down to $10, $20, or $30 [per barrel], but [oil producers] would be giving alternative fuels a difficult time with their ability to manipulate the market," says Mr. Woolsey. "But there is no way that the Saudis or any other oil producer can come close to competing with electricity."

Consumers may ultimately decide

Mr. McCain would provide a $5,000 credit for consumers who buy zero-emission cars and would provide tax incentives to companies to develop more nuclear plants and to help private firms develop a cost-feasible battery "to drive off the nukes," McCain energy adviser Douglas Holtz-Eakin told the Monitor this summer. "It's all about providing greater substitutes," he says.

Others question the candidates' promises to achieve energy independence while, essentially, taxing energy with new cap-and-trade programs on carbon emissions. Mr. Obama has said he wants to greenhouse gases cut by 80 percent below 1990 levels by 2050. McCain is shooting for a 60 percent reduction.

"These policies are wrongheaded in a real sense," says Ken Green, a policy analyst at the conservative American Heritage Institute in Washington. "If you want your society to evolve technologically and devote more resources to protecting the planet, the single best way to do that is to make the economy grow. If you create a market and demand for carbon reduction, the public will step up and buy them. The growth of these sectors is proof of that."

In the end, consumers – in their role as both drivers and voters – will ultimately be responsible for turning the key toward greater, if not complete, energy independence.

"These lower gasoline prices ... are a test," the Greenwood Commonwealth newspaper in Mississippi editorialized last week. "They are in part gauging whether Americans and other oil users will breathe more easily and forget about the importance of developing alternative fuels."

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