As oil and related energy pricessoared to record highs over the past two years, interest in alternative fuels soared, too. Hybrid cars have appeared seemingly overnight, and proposals for solar, wind and other renewable technologies are being made everywhere.
We need to remember, however, that all this action has one cause—high oil prices—and progress could grind to a halt if those prices fall again. It might seem ridiculous to worry about such a thing; don’t we all want to spend less on oil? And isn’t hoping for that just whistling in the dark?
Not necessarily. At present, it is virtually axiomatic in the popular press that growth in demand from the U.S., China, India and elsewhere will keep oil prices high forevermore. But this common wisdom ignores the possibility of recession, or even depression, reducing demand growth to near zero, just as new drilling (mostly overseas) increases supply. Recession is already upon the U.S., and China’s economy is slowing rapidly. As Wall Street collapsed in October, oil prices dropped to around $70 a barrel. Saudi Arabia’s stated goal of maintaining a price floor of $80 a barrel or higher suddenly seemed optimistic.
So what is the problem? In the short run, nothing. But sustained development of new energy sources always rests on the condition of the old ones. Coal did not arise as Europe’s main energy source until Europeans had cut down virtually all their forests for fuel, and the later switch to oil did not occur until the scarcity of coal drove its price high.
In the 1970s Americans responded to high oil prices with alternative energy projects and more fuel-efficient cars. But when prices dropped in the 1980s, we threw caution to the wind—along with the energy projects. We purchased ever larger cars and SUVs and moved to ever more distant suburbs. Sure enough, now that oil prices have spiked again, we are looking at the same alternatives we had relegated to niche markets then.
Today renewable technologies such as wind and solar are close to being competitive with fossil fuels. But we can say good-bye to that prospect if oil prices decline to $60 to $70 a barrel, which could easily happen in a recession, as we witnessed in October. Two years of lower prices can turn hybrid cars into a bad financial proposition for consumers, and green technology start-up companies could go bankrupt as demand for their goods dries up. Even a temporary decrease in petroleum prices would undermine the long-term development of the alternatives we all know we need.
Happily, there is a solution. If investors could rely on a certain lower limit to oil prices, they would have a fixed goal to work toward for making alternatives cost-effective. Knowing the goal removes a large element of risk for entrepreneurs and their financiers, providing a huge incentive to continue development.
A lower limit is easy to accomplish: the federal government has to impose a variable levy on oil to guarantee a floor price. Revenues from that tax could help fund research into alternative energy and offset adverse consequences for lower-income people, who would be hardest hit by the sustained high expense of oil.
Higher taxes? Unthinkable! That sentiment certainly rules in the current political climate. But one thing is certain: the federal government is already running a deficit on the order of $400 billion for this year, and many more billions are promised to save Wall Street; that money will have to come from somewhere. Why not a tax that benefits both the environment and the economy?
Note: This article was originally printed with the title, "Keep Oil Prices High, Please.
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9 Comments
Add CommentUnless of course you are just making ends meet then perhaps you would like to donate your hard earned money to me so I can afford to drive to work?
Reply | Report Abuse | Link to thisI was down to driving nowhere when gas was over $4 a gallon... now that its back to reasonable numbers I can actually make a monthly visit to the grandparents...
Perhaps you should think about those of us who cannot afford high priced energy..
Higher taxes benefit no one but the bureaucrats.
The reason wall street needs all those tax dollars is because the corporations are going broke paying high fuel costs, and people paying high fuel costs are not buying their products.
Reply | Report Abuse | Link to thisWhat we need is both low fuel prices, and move to cleaner, renewable sources. I respectfully submit that Professor Kyle is more interested in the world at large, then individuals. While that view has some merit, it needs to be balanced with the individuals as well.
Last I checked, crude oil was trading at $44/bbl.
Reply | Report Abuse | Link to thisWhile I support alternative energy development, a simple price floor tariff doesn't seem to be the best way about handling the situation, I can imagine plenty of industries that would get (more) inefficient and sloppy in their practices if they knew they wouldn't get any additional profit from producing at a lower cost.
I do support the idea of a price swing tariff, something like a 5% per month price movement allowance, and anything over (up or down) that tax half the price difference. People will scream that this is making a bad problem worse by exacerbating price increases with additional tax, but I believe it would be additional incentive to keep prices more stable.
A very bad knock-on effect of high oil prices is increased oil development pressure on environmentally sensitive and other high-cost fields. I would rather stimulate alternative energy development by increasing the cost of developing new domestic oil fields and taxing imported oil, possibly with a variable rate tariff that keeps the effective price of available oil near $80/bbl.
As Keith3196 says people are indebted up to the hilt, and so cannot afford to consume as before. This little detail was overlooked by speculators. Governments getting loans from sovereign funds only makes the debt situation worse. And big concerns spending their excess capital on buying merginal lands and rivers in third world countries make recovery even further off. Some favour selective taxation such as a 'Polluter - Payer' system as one of the few escape routes. Such a tax would be fair on everyone.
Reply | Report Abuse | Link to thisAnother problem is that even as people conserve and change habits, they still get socked. In New York, because of conservation of electricity, the power companies are raising rates because their revenues declined. So even though we did as urged, we're still being punished for it.
Reply | Report Abuse | Link to thisYou won't have your cheap fuel for long. When things go back to the way they were $4 for gas will seem cheap.
Reply | Report Abuse | Link to this$3 is about the right price. This below $2 has to go or you simply will not be able to drive in three years.
Lower prices and a move to alternatives did not happen in the 80s. The meager version of alternatives during low prices gave us SUVs which were "light trucks" that went around the regulations.
Reply | Report Abuse | Link to thisThe unfortunate paradox about alternate energy is that anything the reduces the demand for oil will lower its price of oil and reduce the attractiveness of alternate energy – in a way it will be sabotaged any of its own successes.
Reply | Report Abuse | Link to thisThe big picture is not pretty as we depend on foreign oil, making foreign energy unattractive at any price. There are just too many strings attached.
I always favored a rationing system where everyone with a Social Security card receives livable allotment at the going price. Rock Stars, CEO’s and Hollywood jetsetters who see nothing wrong with gassing up private jets and heating palatial mansions as well as regular John Doe’s driving obscenely large SUV’s should pay through the nose for what they are doing to us economically, politically and environmentally. Funds collected could be used to fund alternate energy sources and technologies.
The noose could be tightened slowly and predictably, so that no one could cry foul at sudden changes.
Make your choice; cheap energy and wide spread wealth or expensive energy and poverty. For those of you that were not paying attention. In 2008 the oil suppliers took about $800,000,000,000 out of the American economy and started the present melt down.Every thing from food to bars of gold cost energy to produce,even this B.S. internet connection.
Reply | Report Abuse | Link to thisEnergy taxes and rationing will not effect the wealthy, they always have a way to get around those minor inconvenances.
But bureaucrats love them as they mean more power and tax revenue.
Don't worry about alternate energy systems, they will move forward at a deliberate speed as they are needed. If they don't make sense then they are not ready for prime time.
I've been working in alternate energy for over 40 years and I've watched government intervention damage things many times. The only thing government is good for is to enable conmen in making fast money.