Oil price goes down – whoopee
The price of crude oil dropped dramatically last year. This was not unexpected – supply and demand of this resource are finely balanced, so that any political or economic disturbance can cause large fluctuations.
What happens next is that the lower price flows through to the price of fuel, so demand rises. People who have been hesitating to buy a big heavy gas-guzzler rush out and buy one. People drive more. At the same time, the oil supply falls, because marginal oil producers, like the company producing oil from Canadian tar sands, find their business to be uneconomic at the greatly reduced price; also, companies who were planning a program of exploration and drilling might look at the oil price fluctuations in dismay and postpone their endeavors.
Meanwhile, companies who were getting into the business of producing smaller cars or cars powered wholly or partly by batteries, are damaged by a drop in demand and some might give up.
So we will end up where we were before, with wasteful consumption rising, along of course with greenhouse gas emissions, and the oil price rising back to its former high level and continuing from there. We just go round in circles and don’t make progress.
Governments should act to get out of this loop. Motor fuel should be taxed so that the price stays high and the benefits of that can continue to flow. The flood of revenue from such a tax is greatly needed at this time by all governments.
Oil producers who can do so, should reduce their production in step with the reduced demand. They should actually be encouraged to do so, instead of being always encouraged to maximize production. This has happened to some extent.
So, conventional economics says that the drop in the oil price is a good thing all round, but in reality it is bad for everyone. In my Economics for a Round Earth I have tried to describe an economics that fits the realities of the world we live in. In conventional economics, everything must always be as cheap as possible at any moment and consumption at any time must be maximized. Round Earth economics requires that we raise our eyes to the future and take into account limits to everything.
You’re right. Most people see decreasing oil and hence fuel prices as a good thing – even people who consider themselves ‘green’ in other ways. What does a fish know of the water in which it swims?
Excuse the hyperbole, but that’s insane.
Fuel efficiency declines with higher prices. Especially large increases. The National Research Council estimates costs of CO2 and energy dependency at $0.26 a gallon for gasoline. The average gasoline tax in the US is already $0.41. Anything higher than $0.26 + costs of maintenance, expansion, and pollution will put excessive penalties on people and result in irrational and inefficient behavior. Especially if the money collected isn’t spent on addressing those problems or compensating the people affected by them.
Most gasoline use itself is not consumption. It is used to achieve some other economic end. Gasoline is largely not an end use product, it is an input. Only for a small percentage of gasoline usage is gasoline an end use product (e.g., joy riding, snowmobiling, two-tracking, boating, recreational flying, luxury shopping and dining out, pyrophylic gratification). Usually it is an input for some other desired outcome.
Increasing input costs introduces risk to both individuals and businesses. When operating costs are higher and margin are lower, risk is higher and there is less certainty in the economy. It is harder to make good decisions. See last 3 years and current economic crisis.
The argument that fuel efficiency declines with higher prices is not clear, but it is certain that fuel CONSUMPTION declines with higher prices, which is the point.
I would suggest that actually the percentage of gasoline use that is an end-use is actually larger than Aaron says. The reason is that even for serious uses like going to and from work and taking kids to school, the usage is grossly in excess of what is required for the job of carrying one or a few people between points. You don’t need 2 to 3 tons of powerful machinery, capable of over 200 kph (125 mph) to cram each person into a central business district. The job of carrying one person about could be done with a small fraction of the weight and gasoline currently used, with no loss of speed. The mobility of the population would be unaffected.
The crazy system of transport, where each person has their own massive machine, is a temporary artefact of the brief era of cheap abundant oil. It is not something essential and eternal that has to be maintained whatever the cost. Schemes to use biofuels and hydrogen, with big government subsidies, only make sense if the fuel is used sensibly, no more than needed for the job.