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.