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Solutions to America’s Oil Crisis: A Federal Agenda for Reducing Oil Demand and Protecting Consumers 9/29/2005 Download the full report.

Executive Summary

Environment America is the new home of U.S. PIRG's environmental work.

America is too dependent on oil, and consumers are paying the price. For the last two years, gasoline prices have been creeping upward. In 2003, a gallon of regular gasoline averaged $1.56; so far in 2005, the same gallon has averaged $2.20, with prices in some areas spiking close to $4.00 in August and September.

The recent rise in oil and gasoline prices is the result of increasing demand bumping against both natural and technological limits in the world’s ability to produce and supply oil. This tight supply/demand balance, coupled with increased market concentration in the oil industry, has left consumers vulnerable to price spikes at the pump.

The long-term limits on oil resources underscore the important ways in which oil does not operate like other commodities. While market theory would suggest that oil production would simply increase every time demand increases, the geological limits of oil belie this assumption. Should demand continue to increase—as is anticipated under current policies—the most likely scenario is for prices to continue to rise, placing an even greater strain on the American economy and consumers.

Meanwhile, oil companies have raked in record profits. ExxonMobil alone made $25 billion in profits in 2004 and is on pace to surpass that amount in 2005. Essentially, high gasoline prices are helping fuel a massive transfer of wealth from average consumers to large multinational oil companies that benefit from America’s oil dependence.

With consumers being drained at the pump and America spinning into a worsening spiral of dependence, it is well beyond the time for congressional action. Congress has opportunity to parlay the oil industry’s record profits into proposals that will reduce America’s dependence on oil and protect consumers in the long-run.

This paper outlines two policy solutions to address this problem.

Solution #1: Make our cars more fuel efficient.
The best way to cut America’s oil dependence and shield consumers from spikes at the pump is to make cars and light trucks go farther on a gallon of gasoline. Congress and the Bush administration should increase the fuel economy of the country’s fleet of cars and light trucks to 40 miles per gallon and eliminate perverse financial incentives that encourage manufacturers to produce and consumers to choose gas guzzlers over more efficient cars.

Solution #2: Prioritize consumer savings over oil industry profits.
Growing oil demand, shrinking supply, and anti-competitive nature of oil markets provide compelling reasons for Congress and the Bush administration to take immediate action to end the current transfer of wealth to the oil industry and transition consumers to a less oil dependent economy. We must redirect some of the record oil company profits into measures that will dramatically reduce our oil consumption. To this end, we propose:

• Repealing all existing tax breaks for the oil and gas industry. Under current law, the oil and gas industry would receive $10.7 billion in tax breaks between 2005 and 2009. Congress should immediately repeal all existing tax breaks for the oil and gas industry and shift these incentives toward conservation solutions that will help consumers.

• Instituting a windfall profits tax. Congress should immediately enact a windfall profits tax on oil that will recoup a portion of the oil industry’s record profits. The windfall profit tax would only apply when the price of crude oil exceeds $40 per barrel. With the estimated $26 billion in revenue generated in 2005 alone from repealing the tax breaks and establishing a windfall profits tax, we can pursue policies to ease America’s oil dependence and save consumers money. For example:

• Congress could double the tax credit available to consumers purchasing more fuel efficient cars and remove all restrictions on the number of fuel-efficient cars eligible for the credit. In addition, Congress could expand the credit so that it applies to all vehicles that meet the fuel economy and air pollution criteria, regardless of the technology utilized. Every $2 billion of the windfall profit invested in expanding this tax credit would allow approximately 318,000 more consumers to benefit.

• Congress could increase funding for public transportation, such as light rail. Currently, for every $4 that the federal government spends on highways, only $1 is invested in mass transit. This car-dependent transportation system fuels America’s over-reliance on oil. Diverting $8 billion of the windfall profits each year to public transportation would effectively double the federal government’s investment in mass transit. Similarly, for $8 billion, the federal government could build more than 200 miles of light rail—resulting in a 20 percent increase in light rail infrastructure nationally. Alternatively, the revenue could be used to reduce fares on existing public transit systems. With $8 billion, the federal government could enable everyone who rode public transit in 2003 to ride for free.

• Congress could increase funding for the Low Income Home Energy Assistance Program (LIHEAP), a federally funded program that helps low-income households meet their home energy needs through immediate bill payment assistance and weatherization upgrades to make homes more energy efficient. Applying just $2 billion of the windfall profit toward this program could help four million more needy households this winter, when home heating costs are expected to be high.

America’s energy problems are not going to go away on their own, nor can we depend on the market to solve them. The U.S. government needs to step in and help move America toward a more efficient, less oil dependent, energy future while protecting consumers’ wallets, rather than oil companies’ profits.