ONLY TAXES CAN MAKE OIL EXPENSIVE AND FORCE THE INNOVATION:

As Fuel Prices Fall, Will Push For Alternatives Lose Steam? (Steven Mufson, 10/20/08, Washington Post)

Doing something about the amount of gasoline Americans use is essential to defusing future oil shocks. The American motorist is among the most profligate in the world. More than one out of every nine barrels of oil produced worldwide ends up in the gas tanks of cars in the United States. The amount of petroleum burned by U.S. motorists exceeds the entire crude oil output of Saudi Arabia, and that has propped up demand -- and prices.

Yet U.S. cars are among the least fuel efficient in the world. "The U.S. dependence on oil imports is based on waste, not on needs," said Paolo Scaroni, chief executive of Italian oil giant Eni.

Electric cars aren't the only answer. More efficient cars, whether better combustion engines or hybrids like the Prius, may be a cheaper way to achieve big fuel savings.

Some firms are creating substitute fuels such as ethanol derived from corn or diesel derived from algae. Biofuel players range from the oil majors, such as BP and Royal Dutch Shell, to ethanol giants VeraSun Energy and Poet, to tiny firms like Solarzyme, which started in its founders' garage five years ago and is now testing an algae catalyst in a large commercial vat. Many firms are working on cellulosic ethanol, derived from organic materials such as grasses or wood chips, but those factories are still in the pilot or demonstration stage.

Almost all of those alternatives rely on federal subsidies or are counting on lower costs as technology evolves. The cheaper oil gets, the bigger those technological improvements need to be to compete.

The electric car has the potential for making a bigger impact than alternative fuels because it would be powered by the electricity grid, which relies on a mix of coal, nuclear, natural gas and renewable energy sources. Moreover, recharging an electric car is much cheaper than refueling a gasoline car.

Its proponents say the electric car has transformative potential that other transportation alternatives lack. "We want customers to see the Volt as the game changer it is, not only for the technology, but also for business, and maybe more importantly for the way the world drives," said Troy A. Clarke, president of GM North America.

"Reducing our oil dependency meaningfully in the U.S., under any scenario, requires radically improving the efficiency of our vehicles," says Saurin D. Shah, a vice president at investment firm Neuberger Berman who expects an explosion of hybrid and plug-in cars by 2030. He predicts hybrid and electric cars will replace conventional vehicles as swiftly as electric locomotives replaced steam-driven ones.

But because their batteries are expensive, plug-in cars are going to cost as much as $8,000 more than conventional gasoline cars. The lower the price of gasoline, the longer it is going to take for fuel savings to make up for the car purchase premium.