In today’s WSJ an article called “The Upside of the Oil Curse” talked about the benefits of high oil prices. Our experience with the first energy crisis shows how well prices work. For all the talk about conservation and alternatives energy intensity improved by little before the 1973 price spikes. In the 1970s and early 1980s, energy efficiency improved remarkably (2.7% a year). Progress slowed after prices fell, dropping to 1.6% a year from 1986-2002. We just saw progress again when prices rose recently. SUVs sat on the lots; hybrids sold in hours. Prices work.High prices encourage conservation and alternatives like nothing else. In fact, the oil barons and OPEC potentates fear high prices for this very reason. The problem is that oil prices will drop again and will be low about the same time investments in new energy sources could be expected to pay off, so smart money is slower to make such investments.
We missed a big opportunity in the 1990s. Gas prices were at an all time low (real dollars) in 1998. We should have taxed gas then to reduce demand. Instead, we convinced ourselves that $1 a gallon gas was normal and bought SUVs.We will never run out of oil, but the cost in environmental and geopolitical terms may become too high. Why do we continue to use oil? Because it is cheap. Even at today’s prices, gas is cheap. We are still paying less for gas than our grandfathers did in the 1930s.
I apologize to all of you who have heard this from me before (I have linked to some of the other posts), but it must be repeated all the time. If you want conservation and alternative energy, you have to tolerate higher energy prices. You do not get a free lunch. But the good news is that with the proper conservation and energy efficiency, your total bill can be reduced. You just gotta do it because you are responsible for energy use.My fear is that many people prefer fixing blame to finding solutions. I heard an interesting program on NPR. It was Lester Brown, Founder of Earth Policy Institute, fretting about a surge in ethanol production. He advocated ethanol when it was not really practical. Now he has second thoughts. Maybe it is a kind of market phobia. Brown prefers wind power. Good idea. I agree, but we know that wind power has limits and its enemies. The best bet for our energy future is nuclear power, which emits no greenhouse gases. Of course, nuclear power has its detractors. This is the truth and everything else a lie: all forms of energy come with costs. Cheaper forms of energy often come with significant external costs. “Clean” energy requires large capital investment. Often our favorite form of energy is difficult to get. We have to make choices among options, none of which will produce an ideal outcome. One thing is certain, you cannot have energy that is cheap, plentiful, clean and trouble free all at the same time. So make your choices and be realistic.
The price of crude oil tumbled 3.9% today. This is good news for the economy but it presents both a challenge and an opportunity. We need higher fuel prices to encourage conservation and the development of alternatives. I have advocated this many times. As the price approaches $55 a barrel, it is time to think of ways to keep the price of fuel from falling. I advocate a tax on oil to keep the prices up. The big oil companies obviously are not up to the job. Where is price gouging when you need it? You can see why I can never run for elected office. I suppose we could tax only foreign oil. It is always popular to stick it to someone else.Seriously, anyone who cares about a cleaner environment, getting out from under the influence of foreign despots and improving our long-term economic prospects should appreciate this point of view. Unfortunately, driving cheap trumps these concerns for many.
We have been here before. Harry Truman started the first big alternative fuels project. President Carter promised that the U.S. would never again import as much foreign oil as it did in 1977. Twenty-nine years later, President Bush warned about our addiction to oil (BTW more than in 1977). What did we learn? Cheap oil trumps policy promises and alternatives. Sowaddawedo?First, we need to recognize that the problem is political, social and economic, but not really technical. This is important, because we keep on trying to apply the technical solutions and they never work. We use oil because it is cheap. We use foreign oil because it is even cheaper. We want to continue to use oil because it supports the lifestyles we enjoy at a price we accept. Unless we change part of that equation, we will always come up with the same answer – more oil.
Before going on, let me break the problem down into two parts. The one part is oil as an environmental problem. The second part is FOREIGN oil as an economic and geopolitical problem. They are separable. You could solve one and not the other. For example, foreign oil can be replaced by American oil from ANWAR, oil shale from Utah, Colorado & Wyoming or from oil sand from Alberta (yes a foreign country but nearby and generally stable). This oil will cost a little more in terms of dollars and a lot more in terms of environment, but we can achieve reasonable energy independence in this way. This is not the way to go, IMO.Oil use as an environmental threat is the bigger challenge. Remember why we use oil, but then figure in the external costs. This makes oil less of a good deal.
Rand Corporation has recently released a study indicating that falling costs of ethanol, wind power and other forms of renewable energy could allow them to supply 25% of U.S. energy by 2025 at little or no additional expense. (Renewables currently account for only 6% of our energy, and about half of that comes from hydroelectric dams.) This assumes that the price of oil does not decline by very much. Low cost oil (reaching its lowest point in 1998) has destroyed hopes for alternatives before. So let’s make sure the prices do not drop very much.Once they get started, renewables have a big constituency, especially in farm states. The most promising, IMO, is ethanol from wood chips. I admit a personal interest in that. Also interesting are various ways to make methane from manure and other wastes. Read more about these things here.
We almost ran on of oil on many occasions. The first time was just after WWI; Many of us remember the last time in the 1970s. Of course we never ran out of oil. We never run out of anything. What we really mean is that we don’t have a particular resource at a price we are willing to pay. By the time we reach this price with oil, we will have moved to different energy sources.The long term is too uncertain to predict, but we have a good handle on the short and medium runs. In the near term prices will rise. In the medium term, we can expect a drop in oil prices. Why? During the low prices of the 1980s and 1990s, we invested less in energy. It takes many years for an investment to begin to produce results. Much of the capacity that will be available very soon was planned and begun back in 2001 or 2002. What is being started now will be ready in 2008 or 2010. This supply will be supplemented by the development of alternatives and conservation provoked by today’s high prices.
The prospect of cheap oil is not something I eagerly anticipate. The longer the price stays high, the faster we will develop alternatives. I would like nothing more than to reduce the grip of oil on our country. Each price spike makes us less dependent, but the subsequent drop takes off the edge. A higher tax at the pump is one of the few taxes I approve, especially if it replaces other taxes. As the price comes back down we should offset at least some with a higher gas tax. But we won’t have to think about that for a couple of years.