Can Uncle Sam Cut Gas Costs?

May 23, 2007 — -- Nearly two dozen governors asked Congress to hold hearings and investigate the recent surge in gasoline prices. The Connecticut congressional delegation requested the Government Accountability Office (GAO) to investigate. Congress held hearings and legislators proposed price gouging legislation. The House voted to give the government permission to sue OPEC over its production quotas, arguing that the cartel uses them to set the price of oil.

But with gas prices at record highs, is there anything that the government can do to help lower the cost of gasoline?

The ABC News Business Unit spoke with several energy economists and analysts and asked them to comment on proposals often mentioned.

What if the government were to standardize the types of gasoline refined in the United States?

Michelle Foss, chief energy economist at the bureau of Economic Geology at the University of Texas in Austin, said this could lower prices. "If everyone had the same rules in place, it would lower the cost of correcting imbalances and make it easier for suppliers to adjust because demand is not the same in all parts of U.S."

"It would help," agreed Severin Borenstein, director of the University of California Energy, "but it would not fundamentally change it. It would reduce localized extreme priced spikes. But overall increases nationally would not be changed." He added that if the nation decided to go for lower standards and allow for dirtier gasoline, then prices might drop further.

Jerry Taylor, a senior fellow who studies energy policy at the CATO Institute, also said this could lower prices, but added, "Multiplicity of blends is not the reason why we've got high gasoline prices today. It is a very modest factor in terms of price." He also said that certain states and cities have specialized fuels for specific reasons, such as improving air quality.

If oil companies could drill for oil in the Arctic National Wildlife Refuge or in more places offshore, would that lower prices?

More domestic drilling would not help prices in the short term according to the economists and analysts. "Anything developed in terms of new resources," said Foss, "has a longer term impact and is vital and is still important."

If drilling started today in Alaska, it could be six to eight years before any oil would be available for use. Taylor with the CATO Institute said, "Opening up the Arctic National Wildlife Refuge is probably not going to have much impact on prices even in the future. World crude oil prices are established by global supply and demand, not national supply and demand."

Taylor added, "This is not argument against drilling, but it's an argument about not overselling or overpromising what drilling can yield to consumer."

Furthermore, Taylor and Borenstein pointed out that an oil field such as one in northern Alaska might increase daily crude oil supplies by only 1 percent.

"You cannot drill way out of high oil prices in the North American continent," said Borenstein. "There just isn't any oil that can have significant effect."

Some state legislators in Texas want to lift gasoline taxes during the summer. Will lowering taxes lower gasoline prices?

Lowering or removing state and federal gasoline taxes which add 45 cents to the price of a gallon of gasoline could actually increase prices and send even more money to oil companies.

"If you reduce prices, you induce demand, and new demand will eliminate the price decline from tax cut," explained Taylor.

Borenstein said some economists suggest the price of oil and gasoline could be reduced by increasing taxes. If gasoline was more expensive, that would push down demand and then lower prices. To offset those higher taxes, the same economists say payroll taxes should be reduced so the net effect on consumers would be even. "Raising taxes, that's what should be done. But it's a nonstarter."

What if the government were to standardize the price of a gallon of gasoline?"That would be a disaster," said Borenstein. "We did that in the 1970s, we would have gas lines. If you push prices down, you get less supply, more demand and there wouldn't be enough to go around."

Foss added: "No chance the government would be able to figure out the right way. It would muck it up and make it worse."

"Crazy," agreed Taylor.

Should oil companies pay a windfall profit tax when they make this much profit?

The general consensus was this could actually drive up prices. Companies could add the extra tax to the cost of gasoline.

Borenstein said, "Very dangerous. If you don't do it right, it could cause worse prices."

Companies might decide not to upgrade their refineries or explore for more oil if they faced higher taxes should their profits increase. That could lead to reduced gasoline supplies, which could then lead to higher prices.

"If you throw the hammer at industry every time it makes a healthy profit," said Taylor. "You will see less investment in that industry, which would be bad for consumers, which means less supply on market for consumers."

Then there's the question of how the federal government would spend the money.

Is ethanol the solution?Ethanol plays a role, but those experts who talked to ABC News said it is only a part of securing future fuel sources.

"Going forward, we should find alternative transportation fuels and recognize that corn-based ethanol is just not it," said Borenstein. "It's costly, not effective at addressing carbon dioxide and is very limited. We are never going to fundamentally change the picture with ethanol."

"We can't grow enough corn ethanol to replace gasoline in any significant way," said Taylor. "It doesn't protect against supply disruptions overseas."

Is there anything the government could do to help with higher gasoline prices?Foss said that any actions that lowered prices would only encourage more consumption. More consumption means less supply and that means higher prices and it would also increase the nation's dependence on oil and increase harmful emissions connected to climate change.

Borenstein suggested that one option could be raising the fuel standards for the nation's vehicles so they get higher miles per gallon and thus use less gasoline.

Taylor suggested the elimination of laws in approximately 20 states that mandate gasoline cannot be sold below the wholesale costs. Some states require gasoline to be priced a specific percentage higher than the wholesale price. Regulators argue that small, independent gasoline stations could be put out of business by larger retailers such as Costco or Wal-Mart who could price gasoline for less and then raise prices once the competition closed.

"These laws are insane," said Taylor.