The Frugal Superpower: America's Global Leadership in a Cash-Strapped Era

by Michael Mandelbaum

  Cutting back on the consumption of petroleum also has a cost, and here America’s most important post–Cold War foreign policy project differs from the containment of the Cold War era. Sustaining the earlier policy by maintaining a political consensus in favor of paying for it posed a challenge to the United States. For more than four decades the American public proved equal to that challenge. Paying the price necessary for the gradual reduction of the country’s reliance on oil, with all the global benefits that would follow, presents a similar test, but in the first decade of the twenty-first century this was a test that the United States failed miserably.

  The way to reduce oil consumption is simple and well known: raise the price of gasoline. A higher price would have two complementary effects. It would lead to conservation. People would use less gasoline. In the short term they would drive their cars less and make more frequent use of public transportation. Over the long term they would demand fuel-efficient vehicles, which carmakers would then have an economic incentive to produce. At the same time, a higher gasoline price would encourage substitution: fuels other than oil would become economically viable. Entrepreneurs would have a major incentive to invest in the large-scale production of liquid fuels made from plants, for example. With a high enough gasoline price, cars that dispense with liquid fuel altogether and draw their power from battery-generated electricity would become economically attractive.

  A crucial feature that conservation and substitution have in common is innovation, which is the process by which relevant new technologies are created. The gradual, incremental improvement of existing products is just as important a form of innovation as is the invention of entirely new ones, and both require investment. The greater the investment in them, the more rapidly innovations of both kinds that promote the more efficient use of oil and the wider use of oil substitutes will appear. Investment, in turn, requires a price signal. Oil is the cheapest and most efficient fuel for transportation; that is why it became the dominant source of power for the world’s air and surface fleets. Large sums of money will not be invested in methods for conserving oil and in substitutes for it without the assurance that the price of gasoline will be high enough that it will be economically rewarding to use less of it and that the alternative fuels can compete with it on price.

  When the price of internationally traded oil, and therefore gasoline, soared as a result of the two oil shocks of the 1970s, consumers in the United States and elsewhere did cut back on their use of gasoline and money did flow into substitutes for it. To put the United States firmly on the path away from ever-greater dependence on oil, however, will require action by the American government. A government-imposed increase in the price of gasoline in the United States, either through a substantial tax on gasoline at the pump or a price below which the cost of imported oil will not be permitted to fall, or both, is needed, for two reasons.

  First, this would assure potential investors in new fuels and fuel-efficient vehicles that the price of oil will remain high, rather than, as occurred after the two oil shocks, falling back to levels at which innovations in alternatives to it cease to be profitable. Second, a high price for American consumers is particularly important because not only does the United States consume more oil than any other country, but it is also the country from which, with the price of oil appropriately and permanently high, the innovations that can relieve the world’s dependence on oil can be expected to emerge. The United States has the world’s largest capital markets, the most populous and dynamic community of scientists, engineers, and inventors on the planet, and a long tradition of producing commercially viable innovations. A high American gasoline price will thus ultimately lead to the reduction of consumption not only in the United States but all over the world; and because, absent the relevant innovations, oil consumption will skyrocket in Asia, only reductions in oil consumption in all major countries will suffice to lower the global price and therefore the revenues accruing to the oil-exporters, thus ultimately easing the burden of American responsibilities in the Middle East and around the world.

  None of this is either complicated or obscure, and the hazards of continuing high oil consumption and the benefits of reducing it are hardly a secret in the United States. The forty-third American president, George W. Bush, referred to his country’s dependence on imported oil as an “addiction,” thereby placing it in the unsavory company of alcoholism and the habitual ingestion of heroin. The geopolitical disease caused by oil dependence and the cure for this disease are both well known. Nor is it impossible for Western democracies to do what is necessary to cut back on oil consumption: the countries of Western Europe and Japan impose high taxes on gasoline. The United States, however, does not. Their European and Japanese counterparts pay two-and-one-half to three times as much for a gallon of gasoline as do Americans, and sometimes more. For Americans, not only in comparison with what the others pay but also in comparison with what their national interest and the interest of global security require, gasoline is ruinously cheap.

  The collective failure of Americans to charge themselves as much for gasoline as is good for them (and for others) stems from several features of American society and its political culture: the long experience with inexpensive, and for decades American-produced, oil; the resistance to placing limits on consumption of any kind in what has historically been a land of plenty; the size and settlement patterns of the country, which embed long-distance driving deeply in the life of the nation; and the pronounced aversion, not found with anything like the same intensity in other democracies, to taxation of all kinds, which makes elected officials fearful of voting for even such an obviously necessary measure as a gasoline tax.

  So widespread and deeply rooted is the American dislike of taxation that in 2009 the newly installed Obama administration, which, unlike its predecessor, was strongly committed to reducing the country’s reliance on oil, chose as its method of doing so an administrative directive mandating higher gasoline mileage for new cars rather than a tax on gasoline. Increasing the CAFE (Corporate Average Fuel Economy) standard for cars sold in the United States is likely to curtail, to some extent, the American consumption of petroleum, but it is a far less effective and efficient way to accomplish this than a straightforward gasoline tax, something the administration did not even attempt to implement. Its secretary of energy, the Nobel Prize–winning physicist Steven Chu, who had outspokenly endorsed a gasoline tax while a private citizen, admitted shortly after taking office that such a tax was not politically feasible.

  To be sure, the price of imported oil, and therefore of gasoline in the United States, is almost certain to rise, and perhaps rise sharply, during the second decade of the twenty-first century even without a gasoline tax. Market forces, in particular the rising demand in Asia as cars replace bicycles as the vehicle of choice and the slow decline in easily accessible supplies of oil, will surely accomplish that. This rise will produce some conservation and substitution in the United States. A market-driven increase in the oil price will serve American and global interests less well, however, than one engineered by the government, for two reasons.

  First, market-driven price increases have historically been followed by declines. While it has risen over the past three decades, the international oil price has followed a seesaw path, rather than a smooth trajectory, in an upward direction. When it has dipped, some of the investments that have been made in the technologies of conservation and substitution have become unprofitable and were abandoned, while other potential investments were simply not made. A consistently high price would spur more investment. Second, with a government-imposed tax or floor price, much of the revenue from the sale of oil would go to the government, and ultimately, in democracies, to the people it governs. If the government decrees that oil will cost $10 a barrel, for instance, and this reduces consumption enough to depress the market price to $5, the extra $5 goes to the public treasury. By contrast, when the price is set by global supply and demand, the revenue goe
s to the exporting countries: if the price is $10 per barrel the Iranian, Venezuelan, Russian, and Saudi regimes collect all $10. In the first case, that is, American consumers pay themselves. In the second they pay the Iranian mullahs and the patrons of al Qaeda.

  The national insistence on keeping gasoline cheap in the United States is the single greatest failure of twenty-first-century American foreign policy. It is not a failure of understanding or foresight. It is a failure of political will. Here, another comparison with the Cold War policy of containment is instructive. That policy was designed to avoid repeating the disastrous mistakes of the period between the two world wars, when the European democracies failed to address the threat that Hitler’s Germany presented until it was too late to avoid a catastrophic war. Behind their interwar policy of appeasement lay their publics’ reluctance to make modest sacrifices in order to stand up to Hitler in the short term, which would, in retrospect, have avoided the necessity of far larger sacrifices later, and their governments’ reluctance to ask such sacrifices of them. The politics of oil in the United States operates according to the same dynamic, with the same disastrous consequences. The overall cost to Americans of their oil consumption, including the adverse geopolitical consequences, is higher than it would be if they were willing to tax gasoline more heavily, and that overall cost, absent such a tax, will only rise in the years ahead. In this sense cheap oil is the twenty-first-century equivalent of the European appeasement of the 1930s.

  The advent of the Obama administration marked a watershed in the politics of American energy policy not only because the new president brought to office a greater determination to reduce the country’s oil consumption than his predecessor had, but also because in 2009 the politics of oil policy merged with, and was submerged in, a larger issue: climate change. The accumulation in the earth’s atmosphere of greenhouse gases, which prominently include the carbon gases emitted by the burning of fossil fuels, came to be widely regarded, at the end of the twentieth century and the beginning of the twenty-first, as causing a rise in the global temperature.

  The warming of the planet is likely to have a variety of climatic, social, and political effects, none of them predictable with perfect accuracy but some of them all too likely to be disruptive and destructive of human life on Earth. All fossil fuels contribute to this greenhouse effect, so addressing climate change will require reductions in energy usage that go beyond oil to include natural gas and especially coal. In 2009, the first serious American effort to curtail the emission of greenhouse gases, including gasoline, made its way through the Congress, with the encouragement of the new administration.

  For the purpose of reducing the consumption of oil in the United States the placement of gasoline within the political framework of climate change is a mixed blessing. On the one hand, this lends greater urgency to the cause. Using less gasoline becomes a way not only of enhancing American security policy but also of saving the entire planet, and the human species, from potential disaster: droughts, floods, storms, and other possible consequences of a rise in the earth’s temperature. Accordingly, linking it to global warming broadens the coalition devoted to reducing gasoline consumption.

  On the other hand, the sheer magnitude of the problem of climate change presents an obstacle to an effective political response to oil. The scope of the problem means that a comparably broad solution is required, one that will be more expensive for Americans and more disruptive to the American economy than simply curtailing the use of oil. The political coalition opposing dramatic steps to stop climate change is itself bound to be bigger and more powerful than the forces, formidable though they are, arrayed against raising the price of gasoline. The failure of the international climate change conference held in Copenhagen in December 2009 to set binding targets for the reduction of greenhouse gases demonstrated how difficult it will be to implement the measures, which would have to be global in scope, necessary to achieve sufficient reductions in the emission of these gases.

  Moreover, because oil contributes only a part of the greenhouse gases that the United States emits, the legislative efforts to cut back on the emission of these gases will not be aimed exclusively at its use. One of the 2009 climate change bills in the House of Representatives would have raised the price of gasoline by only about 75 cents per gallon. To be sure, by American standards this would count as an appreciable increase, but it is one that would still leave Americans paying far less than the Western Europeans and the Japanese.

  The American dependence on oil, with all the ill effects that follow from it, has the same fundamental cause as the impending economic constraints on American foreign policy and those who rely on it: the failure to pay the full costs of what is consumed. For energy, the American price of oil does not take account of what economists call externalities: costs associated with its use not captured by its selling price, in this case costs that include the impact both on the environment and on the protection of American interests in the Middle East and around the world. The real cost of a gallon of gasoline, for example—although not the price at the pump in the United States—properly includes the cost of the American military forces that ensure that it reaches the consumer. The fiscal policy of the United States (as well as the economic behavior of many households) has exhibited the same syndrome: the failure to pay the full cost of what the federal government does. In fiscal terms, the gap between what individuals and governments spend, on the one hand, and what individuals earn and governments collect in taxes, on the other, is bridged by borrowing.

  Borrowed money ultimately has to be paid back, with interest, and so the resort to it, like the failure to reduce oil consumption and perhaps the failure to curb greenhouse gas emissions, simply postpones the day of reckoning and increases the price that has to be paid when that day arrives. September 15, 2008, is a red-letter day in the history of American foreign policy precisely because it marks the beginning of an extended day of fiscal reckoning, one that will impose new limits on the conduct of America’s foreign relations.

  If the fiscal problem and the oil problem are similar in structure, the solutions to them complement each other. The solution is straightforward in each case: the government needs to collect more revenue and individuals need to consume less oil. Taxing gasoline is a way to achieve both. Gasoline, moreover, has a distinct advantage over the American government’s other two principal sources of revenue. The Social Security program draws its funding from a payroll tax. General government expenditures depend on the federal income tax. Raising these taxes, however, has negative economic consequences: curtailing job creation in the first case and, by some accounts, discouraging work in the second.

  Furthermore, raising these two taxes would diminish the willingness of the American taxpayer, who will have to pay them, to continue to support the foreign policies on which global prosperity and stability have come to depend. The steep rises in the familiar forms of taxation that the events of September 15 and their aftermath portend, when they occur, will indirectly weaken the American global role and so make the world both a more dangerous and a far poorer place. A rising gasoline tax, however, would have the opposite effect. Because it would lower the American and the global consumption of oil and thus weaken the forces that threaten American and global interests in the Middle East and beyond, for Americans to pay more for gasoline would strengthen the role of the United States abroad and make the world a safer, wealthier place for almost everyone.

  CONCLUSION

  The most sweeping changes in international relations have come about as a direct result of the great wars of modern history. In the wake of the Napoleonic Wars of the late eighteenth and early nineteenth centuries, the two world wars of the first half of the twentieth century, and the Cold War, political systems and sovereign states with long histories were swept away and new ones were born, borders shifted, and some countries fell from the heights of international power while others replaced them at the top of the global hierarchy. The growing economic
constraints on American foreign policy will not have such immediate, visibly dramatic effects, but like the great wars of the past, they too will change the world.

  The impact of America’s fiscal challenges will resemble, in some ways, the ebbing of British power. In the nineteenth century and for the first part of the twentieth, Great Britain deployed formidable military might and economic strength. With these assets, and especially through the possession of the largest empire and most capable navy on the planet, the British provided some of the global services that the United States furnished in the twenty-first. World War II accelerated the decline that had begun in the previous century, so that Great Britain was unable to contribute as it once had to international security and to the smooth functioning of the international economy.

  The contraction of America’s international role will not be as steep. The United States will remain, into the second decade of the twenty-first century and perhaps beyond, of all the countries in the world the one with the most capable military forces and largest economy. On the other hand, when Britain could no longer provide global governance the United States stepped in to replace it. No country now stands ready to replace the United States, so the loss to international peace and prosperity has the potential to be greater as America pulls back than when Britain did. For precisely this reason, the United States will not give up all of its global responsibilities and abandon all of the missions it undertook in the wake of the Cold War, even as paying for them becomes increasingly difficult. It will, however, give up some of them.