Five Percent: Conserve Energy

Climate Change Is Important: Energy Conservation is the First Step

October 21, 2008

Is Gasoline at $2.79/gallon Good?

Category: Big Things,Climate Change,News,Observations,Political – Tom Harrison – 4:21 pm

On Sunday an article by Roger Lowenstein, a former reporter for the Wall Street Journal, appeared in the New York Times titled “What’s Really Wrong with the Price of Oil?” It’s pretty long, and thorough. He dispassionately describes the various forces affecting the price of oil, especially its price over the last year or so, in economic terms.

He’s pretty economically conservative, in my estimation, which is why I was surprised to see the following:

The way to avoid a repeat is to dust off an idea that Gerald Ford once proposed: a tax on oil. Ideally, it would kick in only if the price fell back to, say, $70 a barrel. The beauty of this tax is that, very likely, no one would have to pay it. The tax would merely serve as a floor — a new lower bound.

What? A tax on oil? Wouldn’t that make it even more expensive?

Then today, the Times has an article reporting on OPEC’s response to the slumping price of oil (which is nearly the same price as it was last year at this time). And then, an article on how alternative energy is going to have a hard time competing against these low energy prices.

All of these are related.

Alternative energy looked like a better and better idea … until, as today, I filled my tank with gas costing $2.992.79/gallon from the same store that was charging $4.89/gallon this summer. Wow — what a stunning drop. I felt it, and even I felt a bit of relief. The relief for consumers is a serious concern for producers — OPEC will most likely respond by restricting supply in order to drive up prices … a little. Wow.

Wasn’t it just a few months ago that Bush was begging the Saudis to do something about high prices? Now they’re so low they are going to raise them!

Oil Prices Over a Year

Oil Prices Over a Year

Most of what we’re responding to here is change. It didn’t seem like oil was cheap a year or so ago when it was $70 – $80/bbl. Today that seems like a bargain. And this is where Lowenstein’s proposal, which is to institute a price floor, has some merit. When markets are volatile, everyone’s assumptions about how things work stop working. So a price floor would stick a price at a level everyone could count on.

Yet, it’s only just one idea. I have been a proponent of a gas tax for a long time. It is very direct in its effect, as we saw this summer, higher prices certainly affect behavior.

But I seriously doubt such a tax is likely to get anywhere. For one, it has no immediate value (unless oil prices continue to fall, which seems dubious). Secondly, if it does kick in, it would affect people — the same ones getting hammered by other financial storms, not to mention companies. This doesn’t sound like it is politically feasible. Remember, oil prices are only low relatively.

A more fundamental disagreement here is that we really have several problems to solve. One is dependence on foreign oil. One is financial crisis. One is global warming. Aren’t we better off finding a solution that addresses all of these issues?

The alternative energy article in the Times reports

Wall Street analysts say most utilities and other builders can profitably choose big wind projects over gas-fired plants only when gas prices are $8 per thousand cubic feet or higher. Natural gas settled Monday at about $6.79 per thousand cubic feet, down from about $13.58 on July 3.

But this argument is simple, straight-up economics. We can learn from history that if we follow the price signals of the markets, we’re doomed to repeat the mistakes we made in the 80’s, when oil prices slumped after the first energy crisis. Most of the progress we made then in improving efficiency of our buildings and vehicles was put on hold (for 25 years) until we faced another oil crisis.

We cannot let this happen again. It is quite encouraging to see Obama looking at the bigger picture here: all three problems at once look a little different: we need energy independence — we’re trivially closer to that goal as a result of lower prices, and jobs, and to deal with global warming.

Economics will do some of the work if we put a price on carbon and build it in to the cost of carbon-emitting fuels. Cap and trade for carbon, depending on how it’s structured, spreads the load more evenly across a wider range of products, and is therefore a more equitable solution. It’s easy (well, easier) to measure, creates incentives that kick in more and more over time, it has worked in very similar cases, is in effect in 10 states now, and is well accepted in the global community.

Cap-and-trade only partly solves multiple problems.

What’s left? Clear leadership. We have to solve the problems of energy independence, jobs and global warming, even if the price of oil is lower. Nothing about a bad economy makes any of these easier, but it doesn’t make them any less important.

Indeed, if we can get our heads out of the sand briefly and recognize what’s really going on here with the economy, we might come to understand that none of the current solutions to financial crisis have the vaguest hope of addressing the larger underlying problems (the “fundamentally unsound”) parts of the economy.

Concerted efforts involving market solutions, leadership from the top, supported by clear legislative programs can work together to not only dig us out of the mess we’re in now, but do it in such a way that in the next ten or twenty years from now we’re not facing the same problems we shirked from solving in the early 80’s.

A price floor is a fine idea. But it is far from the larger solution to the larger problem we face.

1 Comment

  1. Tom,
    Well said. The recent drop in the cost of fuel lately I would compare to selling jewelry. When you sell jewelry, you direct the customer to the most expensive pieces in the store first. If the customer objects to the price, then you direct them to a less expensive line, which is also high. However, now the “sticker shock” has worn off making the customer more inclined buy the less expensive line – which you actually wanted them to buy in the first place. This is what is happening with the price of gas.
    The “sticker shock” of $4 -5 per gallon gas in now wearing off as the price approaches $3 or lower. People being people, they will now go back to their previous ways of driving and the problem of reducing fossil fuel consumption will fade into the sunset – for a while. Besides, the recent price crisis did not last long enough to cause a permanent change in consumer driving habits.
    I do worry that if we do not have proper leadership we will put our collective heads back in the sand when it comes to energy independence – until a much worse problem comes along. Only then it will be too late to fix.

    Comment by Debra Norvil — October 22, 2008 @ 6:39 pm

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