Obama to Detroit: Drop Dead

By Liz PeekFinancial Columnist

Call me crazy, but this doesn't seem like the best time to add to the host of problems already facing the Big Three automakers. President Obama's move to allow individual states to mandate their own emission standards is a little like requiring airlines to communicate with air towers across the country in different languages.

[caption id="attachment_6255" align="aligncenter" width="300" caption="President Barack Obama signs an executive order after speaking about jobs, energy independence, and climate change, Monday, Jan. 26, 2009, in the East Room of the White House in Washington. (AP Photo/Charles Dharapak)"][/caption]

The notion of larger markets creating greater efficiencies-- the rationale behind the formation of the European Union for example --seems to have eluded the White House.

Creating an economic rationale for aging the auto fleet just couldn't be worse for emissions, as any environmentalist worth his Birkenstocks will tell you. This is not the way, Mr. President, to counter global warming or to reduce our dependence on foreign oil. Since you asked, I'm going to tell you what might actually move us along the road to reduced oil imports. And could very well freshen our air quality.

Let us together agree that relying on oil producers like Venezuela and Russia for economic stability is risky in the extreme. Further, let us acknowledge that in the short run, meaning the next ten years, we will realistically reduce our use of oil for transportation only at the margin, notwithstanding the phasing-in of higher emissions standards that are already on the books.

Instead of running GM and Ford out of existence, how about initiating an oil import fee? Last summer, when Americans were paying over $100/barrel equivalent price for gasoline, it would have been relatively easy to embrace such a measure, but the government again whiffed when it came to creating a long-term solution to an ongoing problem. Initiating a fee on all imported oil would put a floor under oil prices, thus encouraging domestic production and also ramping up investment in the windmills and solar panels you love so dearly.

Let us imagine for a moment that we create a flexible import fee that in effect establishes a domestic price of $70/barrel for oil. Though consumers would initially bear the brunt of the increase from today's price of around $45, my guess is that we are edging towards a higher price in any case and the imposed disadvantage would prove temporary. OPEC has finally got its ducks in a row and has managed to reduce output. Many long-time oil watchers cite a mid-70 dollar price as an equilibrium point, below which incremental supply vanishes and above which demand wanes and incremental higher-priced supplies and alternative energy sources thrive.

A sustained and predictable $70 price for oil would encourage conservation, cause car buyers to favor efficient vehicles, and make investing in new clean-air technologies feasible. It would also halt the fall-off in oilfield investment currently underway. It would, in fact, create jobs.

Here's the advantage to this approach, Mr. President. It reduces the need for a new and necessarily inefficient bureaucracy whose mission it is to separate good windmills from bad, or to mandate consumer expenditures on insulation. Let the market sort out how to reduce oil imports. The reason this has never worked in the past is that periods of high oil prices have invariably been followed by oil becoming cheap. The lead time on most energy investments is long; businesses and homeowners need to be sure that there will be a payoff if they invest in energy-saving measures. Let's give them that certainty -- and see what happens.