Repealing the Laws of Economics - Is a solution for higher energy prices political?

OK, so gas is more expensive than it was a year ago (and surprise even more expensive than it was 20 years ago although that is in nominal terms only). Some morons in Sacramento and Washington are blathering about the excess profits of the oil companies. Oil is a commodity business. When more people want the product, the price rises. So what should we do? Part of the solutions are, indeed, political - but those things should not try to alter prices directly - experience tells us those moves will be unsuccessful.

Even if we should not try to work on "excess profits taxes" or other silly panderings there are some political decisions that have contributed to our current problems -

1) We have reduced the refining capacity in the US over the last decade - indeed in 1981 there were twice as many refineries in the US as today. There are currently only 149 refineries in the US. That means we have to run the existing plants at higher capacity and we have a smaller margin of error. The enviromentalists would argue that the reduced capacity is a good thing. But if we want to even begin to satisfy demand we will need to have more refining capacity.
2) We have artificially reduced our supply. We now get about 38% of our oil from instate wells and another 21% from Alaska. What kind of situation would we be in if we had opened up the Alaska plots to limited drilling or if we had opened the land off the California coast. Not producing oil has its consequences. The increases in the price of Alaska crude is worth about 70¢ per gallon alone. In early 2005 the price was just under $2 per gallon. Demand for gasoline in the state is expected to increase by about 20% before the end of the decade. We should be willing to increase supply in two ways - first we should be more flexible about the places we are willing to drill - even if we need to have fairly stringent environmental regulations. But second, we should think about methods to encourage the development of alternative fuels. Iraq's capacity has also been reduced by something like 1% of world supply.
3) The economics of gasoline are interesting - a buck in the cost of a barrel of crude amounts to about 2.5¢ per gallon. Taxes are more than 36¢ per gallon plus sales taxes - thus the tax on gasoline in the state a) rises with increases in crude prices and b) amounts to roughly more than 60¢ per gallon - by any count that is a pretty stiff rate.

Finally there is a comment on history. In the first Arab oil embargo, I worked in the White House for William Simon the first federal energy czar. At one point his key staff had an argument about the elasticity of demand for gasoline. I argued that there was not much elasticity of demand - some people had to drive and they would pay any price. Simon took the free market view - that gasoline was an elastic commodity. I was wrong and Bill was right. As prices increased from 25¢ per gallon to $1.50 demand was dampened substantially. At the same time consumer buying habits on cars moved quickly. I suspect this too will happen again. The Bureau of Economic Affairs offers one possible explanation about why this rise seems a bit less painful than earlier ones. 25 years ago energy amounted to about 10% of our discretionary spending - now it is about one dollar in sixteen. Even with that change some politicians seem to think they can get their taxes in.

The solution to this problem requires a conscientious look at other alternatives that will increase supply. ANWR and Enthanol will only be a small change for the current problem - but in the long term they offer some real possibility. The most prudent policy here would be to buy a lot of duct tape and use it for all of the politicians who talk about "excess profits" or any other fanciful notion and ignore the possibilities of alternative fuel sources.