Jewish World Review May 2, 2006 / 4 Iyar, 5766

Put some sugar in your tank

By Niall Ferguson

http://www.JewishWorldReview.com | The British call it petrol. Americans prefer gasoline. But whatever you call it, prices at the pump are soaring. Last week, gas topped $3 a gallon in parts of the U.S. That's nothing. Driving down England's M40 on Friday, I passed stations selling regular unleaded for the equivalent of $6.62 a gallon. If they offered fuel at U.S. prices, there would be a queue from Heathrow to Birmingham.

It's no great mystery why the British pay more than double what Americans pay. For years, Britain has levied much higher taxes on fossil fuels than the United States. So if British motorists want to blame someone for the high cost of motoring, they know where to start.

Of course, it's not the government's fault that the underlying price of petrol has risen steeply since Tony Blair came into office. Crude oil futures in recent weeks hit more than $75 a barrel. That's six times the price producers were asking in December 1998.

So who's to blame for higher oil prices? Lord Browne, chief executive of British Petroleum, points the finger at hedge funds. Leading Democrats blame President Bush for being too "cozy" with the oil industry. Those who argued that the Bush administration invaded Iraq to make oil cheap now argue that it was in fact, er, to make oil dear.

This blame game is a farce. The price of fuel is high because global demand has risen about 40% in the last 20 years. In the last five years, the G-7 countries have accounted for just 15% of the growth in global demand; China has accounted for twice that. Soaring demand is coinciding with stagnant supply. Global refining capacity has scarcely grown, and it took a big knock from last year's hurricanes. Meanwhile, political instability in some principal oil-producing countries — Iraq, Nigeria and Venezuela — has made commodity traders and intelligent investors legitimately pessimistic about future supply. And let's not forget the possibility of U.S. airstrikes against Iran.

Could we be about to relive the 1970s, which was the last time oil prices were this high relative to other consumer prices? The good news is that, thanks to increased efficiency and reduced industry, the G-7 economies are much less dependent on oil than they were in the days of bell-bottoms. Some analysts even argue that high oil prices are good, on the principle that they send a signal to producers and consumers that it is time to seek new sources of energy.

Nonsense. The trouble is that high oil prices are not a big enough inducement to reduce fossil-fuel consumption. On the contrary, they are as much a signal for oil companies to exploit hitherto nonviable deposits of hydrocarbons, such as Canada's tar sands.

So what is to be done? Is there a better way to propel ourselves around than sucking oil out of the ground, refining it and setting it alight in internal combustion engines? The answer is yes.

I've often agreed with Homer Simpson that alcohol is the solution (as well as the cause) of most of life's problems. In this case, the answer is the form of alcohol known as ethanol, which is derived from plants, such as sugar cane.

Unnoticed in the Northern Hemisphere, one country is pioneering a transportation revolution by switching to ethanol: Brazil. Today, ethanol accounts for 40% of all automobile fuel in Brazil; 80% of new Brazilian cars are flexible-fuel cars that can run on either petrol or ethanol.

What's preventing the Northern Hemisphere from following Brazil's lead? The answer is not so much Big Oil — though U.S. oil companies have fought tooth and nail against the introduction of ethanol, even as a fuel additive — as Small Agriculture. To protect northern farmers, huge tariffs are imposed on imports of Brazilian-produced ethanol by the U.S. and the European Union.

Yet not even a world of perfect free trade would convert humanity to more prudent forms of propulsion. More tax incentives also are needed to encourage people to buy flexible-fuel cars.

And if you want to know how to pay for those tax breaks, just ask the British. British-style taxation of gasoline won't stop Americans from driving Hummers. But it could help finance a transition to the car of the future: "green" Hummers that run on booze.