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DRIVING WHILE DELUDED

THE CHEAPEST LIQUID IN THE FILLING STATION IS STILL PETROL

In this second extract from "Zoom", their forthcoming book about the next revolution in cars and fuel, Iain Carson and Vijay Vaitheeswaran look at the hidden subsidies which keep American petrol prices down, and crowd out cleaner fuels...

Special to MORE INTELLIGENT LIFE

Americans are forever complaining about gasoline prices at the pump--especially in summer, as consumers get ready for what market analysts call the "driving season" leading up to Labor Day.

But despite the perpetual moaning, gasoline is hardly over-priced. Adjust for inflation, and it turns out that Americans were paying as much or more for it a few decades ago. The 30-cents-a-gallon price that old-timers recall from the 1960s is, in today's prices, really about $2 a gallon. The $1.25-a-gallon price that more people remember from the 1980s translates in today's money to about $2.50 a gallon. In fact, gasoline is a bargain at today's prices. If you don't believe it, get out of your SUV and buy a quart of milk, a cup of java, or a bottle of mouthwash in the Kwikie Mart. Gallon for gallon, gasoline is still the cheapest liquid you can buy at most American filling stations.

Even the $2-plus-per-gallon price now upsetting Americans bears no relation to the true cost of gas. Securing, extracing and burning petroleum brings within it complications, from the geopolitical to the environmental, that cost the country dearly.

One sort of hidden cost arises from the militarisation of America's energy policy. The Cato Institute, a libertarian think-tank, calculates that America spent $30bn to $60bn a year safeguarding Middle Eastern oil supplies during the 1990s, even though its imports from that region totalled only about $10bn a year.

A more comprehensive study of oil's security subsidies added in the cost of maintaining the taxpayer-funded strategic petroleum reserve, and other oil-protection services--such as the Coast Guard's work clearing shipping lanes and providing navigational support for oil tankers--to conclude that the energy-security subsidy for Big Oil is really $78bn to $158bn a year.

There is another reason Americans do not pay an honest price for gasoline: tax breaks and pork-barrel giveaways for Big Oil. The scope, scale and stealth of subsidies handed out to the oil industry are nothing short of shameful.

There is a long tradition of giving the industry cheap access to oil on federal lands through tax relief. In recent decades it has won the right to overly generous depletion allowances, to expense its exploration and production costs, and credit for the costs involved in enhanced oil recover. The National Commission on Energy Policy, a sober, bipartisan panel of experts, argues that from 1968 to 2000 such giveaways have cost taxpayers $134bn or more, in inflation-adjusted dollars.

Fossil fuels get a free ride in yet another way. The harm that these dirty fuels do when burned costs society and individuals a lot of money--but the driver does not pay for this at the pump. In the jargon of economists, the "externalities" of gasoline use are not rolled into its price. Instead, we pay through the suffering of asthmatic children, higher health-care costs, economic output lost to sickness, damaged agricultural output--and, in coming years, through losses related to global warming.

Clean, homegrown alternatives, such as hydrogen fuel made from renewable energy sources, or cellulosic ethanol made from agricultural waste, would impose only tiny externalities on society. But they may never get a fair chance to compete.

Given all this, it is only reasonable to ask what the real price should be at the pump for gasoline. Leading energy economists have argued that America's gas tax needs to increase by at least a dollar a gallon to account for externalities. Others insist the right figure is much higher.

Nobody knows the answer with any precision, but we do know two things with absolute certainty. First, while we may not know the precise size of oil's externalities, we can be sure it is not zero. Second, we know the direction gasoline prices must go in order to get closer to an honest price: up.

Tomorrow: Five principles for a new energy policy