Four Ways to Cut the Price of Oil and Keep the Savings in the U.S.

05/24/2011 05:57 pm ET | Updated Jul 24, 2011

NEW YORK -- With all the partisan debate over spending cuts in the U.S., energy policy seems to be pretty far down on everyone's agenda. That's a shame because there is probably no other single area that could have a bigger impact on the country's finances. Think of it this way: Every 10 percent reduction in the price of oil represents a $36 billion tax cut for America.

The United States imports 10 million barrels of oil a day. At a price of $100 per barrel that's $365 billion a year that the country is being "taxed" by foreign suppliers. It is an urgent national priority to reduce this cost both in financial terms and for national security. And, no, the recent drop in oil prices and promised relief at the gas pump projected for the summer doesn't change a thing. If anything, it should inspire the U.S. to act more aggressively to drive prices down further.

Fortunately, the means are at hand to make a meaningful impact on this cost and keep the savings home. Here four ways it can happen.

Hold Mideast allies to their word -- Some of the current cost may be temporary and described as a risk premium for uncertainties in the Middle East, particularly Libya. Libyan production is 1.9 million barrels per day of high quality oil, which is roughly 2.5 percent of world output of 84 million barrels a day. Eventually there is every reasonable expectation that Libyan production will come back, as Col. Qaddafi will be ousted and the oil will be quickly produced (Qatar has already indicated that they would help with the transshipment) or he will somehow survive or some kind of compromise be reached, in which case Iran or some other country will undoubtedly facilitate the sale of the oil. In the meantime, Saudi Arabia has indicated that it would increase production by 3.5 million barrels a day and Kuwait has indicated they would increase production by 500,000 barrels per day to offset any shortfall from Libyan production. It is unclear whether such added supply has come on the market but it is clear that one way or the other, adequate supply and lower prices are at hand if Saudi Arabia and Kuwait keep their word. We should put the pressure on to see they do and that the markets acknowledge it.

Start leveraging natural gas to electrify vehicles -- The United States can take its massive natural gas reserves and supply them to our utilities, which are underutilized at night, to produce electric power to drive electric and hybrid vehicles. This is a multi-year program that will not be achieved instantaneously, but starting it can materially affect the current expectations and behavior of those who own oil. Historically those expectations have been for ever-increasing prices because of worldwide demand and an increased number of autos. But should those expectations be changed sellers would tend to sell. Cheating by OPEC members would tend to increase and it would be extremely difficult for the cartel to enforce its quotas. A significant failure of United States policies over the last 40 years since the first OPEC embargo has been inaction on our part to reduce demand and as a consequence expectations.

There are major side benefits to this approach. We would create a major worldwide auto industry with advanced technology and real jobs for our labor force. Much of this technology and know-how could be exported for the benefit of our companies and our country. Of course much of the natural gas would come from shale and we must carefully identify what risks that poses to the water supply and to the environment.

Increase gasoline taxes --There is little doubt a gas tax would lower demand. Any regressive aspect could be moderated by either income tax benefits or rebates to the lowest income segment of the population. Tax benefits to businesses that reduce their gasoline consumption could help ease the burden on commercial users.

Stop throwing good money after bad -- Counterproductive policy such as those involving ethanol should be abandoned. Not only do these approaches not reduce the demand for imported oil but they raise the price of corn and other food imports. The consequence of the latter plus the price of oil is an income squeeze on the lowest income parts of not just the United States but the world. The subsidies would be better spent on alternative energy sources like wind and solar that could cut demand for oil.

The fact that the U.S. is more obsessed with cutting taxes that it pays to itself than with cutting the "taxes" it pays to OPEC is a situation that must be corrected. Energy policies that address supply and demand for gasoline are the answer.