The Mixed Blessings of $100 Oil

There sure was a frenzy when oil prices surged close to $150 per barrel over the summer and gas prices crested at $4 per gallon. John McCain called for suspending the federal gas tax. Car buyers freaked out and virtually stopped buying big SUVs. "Energy policy"—usually a sleeper issue—became front-page news.

It's a lot quieter now that oil prices are drifting back down toward $100 per barrel and maybe lower. Cheaper oil will certainly give consumers a breather and ease inflation worries. Yet the dramatic fall in oil prices could have unforeseen—and unfortunate—consequences. Here are a few:

Energy will move to the back seat in the presidential campaign. For a while, it looked like the candidates' differing views of America's energy needs would be a hot-button campaign issue. McCain favors aggressive offshore drilling in Alaska and elsewhere and more nuclear power. Barack Obama

wants to make cars more efficient and invest in advanced energy technologies. When $4 gas was sucking the cash out of American wallets, energy suddenly became everybody's problem. But as gas prices drift back toward $3, and possibly lower, other pocketbook issues—such as housing, jobs, taxes, and the economy in general—will eclipse energy. Campaigns are all about what's on voters' minds today. And when energy is cheap—what's the problem?

"Energy independence" will be kicked down the road. Did you hear politicians thundering about the need to divorce ourselves from Saudi, Russian, and Venezuelan oil in 2006? Or 2000? Sure, this is a vital cause for core environmentalists and reformers who want to see America less dependent on dictators and sheiks for energy. But for many people, "energy independence" is really just a euphemism for "cheap gas." When pump prices spike, suddenly we feel enraged that foreigners are holding us hostage. But when gas and oil are cheap, we don't mind being dependent on them, because "freedom" would cost more. So, enthusiasm for energy independence will probably fade until prices start to go back up.

Alternative energy will remain in disarray. The federal government loves to fund alternative energy—so much so that it picks a new favorite every year or two. "In 2003, it was hydrogen, then biofuels, then plug-ins," says David Friedman of the Union of Concerned Scientists. "It's like a bunch of little kids running around grabbing at the shiny object." Binge-and-purge funding wreaks havoc on research programs because scientists often can't finish what they start. Then they get frustrated and stop applying for grants altogether.

A sense of crisis, like we had over the summer, would help increase funding and also discourage members of Congress from diverting money to pet projects in their home districts that have little or nothing to do with national energy priorities. But business as usual means alternative-energy funding may look more like a slush fund for influential lawmakers than an urgent effort to address a major problem.

The market for hybrids will dissipate. Most hybrids cost extra, and car buyers are pretty good at math: They'll pay the additional $2,000 or $3,000 if they think they'll earn it back in gas savings over a reasonable amount of time, like three or four years. That payback window gets shorter if gas is expensive and longer if gas is cheap. With gas prices falling, hybrids make less sense financially. Fewer people will buy them, and manufacturers, in turn, will offer fewer hybrid models.

The effect on other gasoline alternatives, like cars powered by biofuels, electricity, or hydrogen, may be even more stark. Those technologies will be expensive at first and only come down in price if manufacturers can sell them in large quantities. If gas is cheap, why would anybody risk a lot of extra money on a car that's unproven and weird, even if it gets double or triple the mileage? For all the talk about alternatives, gas-powered internal-combustion engines are so reliable and widely accepted that it will take something revolutionary or dramatic to displace them.

SUVs will come roaring back. The sting of $80 fill-ups may last for a while, and Americans probably won't upsize their rides quite as fast as they've downsized. One reason is that General Motors, Ford, and Chrysler have recently made long-term cutbacks in the factories that build big trucks and SUVs. But there's good reason to think that land yachts will reclaim the road if gas gets cheap once again.

After the oil shocks of the 1970s, small cars and alternative energy had a brief moment in the sun, until gas fell to new lows and cars got bigger, setting the stage for the debut of the SUV in the late 1980s. Consumers may already be drifting back in that direction: General Motors claims that a 40-cent decline in pump prices helped stoke a late-summer surge in truck and SUV sales. Those buyers may regret the purchase in two or three years, if long-term predictions about rising oil and gas prices prove true. But for a few months at least, happy days are here again.

Comments

[john s. gordon:]

remember the true nature of capitalism - driven by profits, profits are made by getting rid of the resource as rapidly as possible w/no thought to the future. grab your profit & run.
> jack

2008 Sep 09 08:36 AM

[Shenandoah:]

Good, thoughtul article. It is amazing how the energy gods manage to keep us just short of serious action.

2008 Sep 09 09:16 AM

[canary:]

Importing too much oil destroys our economy, our jobs, and our deficit.
Drilling must be expanded in coastal areas and Alaska.
The workday car should run on compressed natural gas. This has twice the range of a battery-car , is lighter,cheaper, burns cleaner than gasoline, costs less to run (battery depreciation is over $10 per hour and CNG costs half of gasoline). The filliament wound tanks would be made in Michigan vs a China battery.

2008 Sep 09 10:51 AM

[john s. gordon:]

i just drove my car from virginia to nova scotia, did not see any CNG fillup stations along the way. my car has no space available for filament-wound tanks anyway. how many grams of CNG cn you stuff into a filament- wound tank ?
> jack

2008 Sep 09 12:41 PM

[Chris B:]

It may be that the oil spike of '08 was warning #2 (and the 70's was warning #1). Given the sad state of our culture and the perception that the size of a person's transportation appliance confers status, I have no doubt we will slip into the habits of the past at $3/gal. We might even think ourselves lucky to be paying such a "low" price.

It's not so low though when someone you know gets killed in an oil war, inflation rises above 5%, and the government does more to protect the investments of foreigners (FNM and FRE bailouts) than it does for its people.

2008 Sep 09 05:06 PM

[Alex Filonov:]

$100 is still way too high. There is still room for alt fuels and alt energy, if they are possible at all. If they can't be made profitable at $100 oil, who needs them?
Energy independence was, is and always will be a political slogan. It has nothing to do with economy and markets. As for dependence on oil producing countries, they depend on us more than we depend on them. Where do you think Saudis would buy Jeeps? They really love SUVs... And Russians like to eat and buy a lot of food in US and I can't blame them.

2008 Sep 09 06:27 PM