With the oil shock, climate change, and credit/finance crisis, we’ve reached a kind of historical/economic pivot point in which various interconnected systems that used to work reasonably well are no longer functioning, and each malfunction reverberates through all the systems – energy, financial, climate, environment, social/political. It’s quite a predicament, for which there’s no real precedent and no obvious solution. Lower interest rates to juice the economy and the dollar falls, oil prices rise, inflation goes up. Etc. It’s like the wiring on a sound system is all screwed up – turn up the volume, and you get a terrible screech instead. Energy prices are especially worrisome. The U.S. government has precious little say over them, and while there are obvious policy solutions (such raising the price of carbon emissions, building more mass transit, underwriting new technologies/alternative fuels) they seem likely to cause short-term pain with an uncertain long-term payoff.
Still, I became somewhat less morose after reading Daniel Yergin’s testimony before Congress’s Joint Economic Committee. There’s quite a lot to it, and it’s worth a read, but I’ll mention just one thing. Yergin has been speculating for a while about the “break point” – an oil price high enough to force a definitive break with oil – i.e., apparently where we are right now. Obviously such a “break” would be a very, very good thing, and there’s some evidence it’s already underway:
…there is much talk about “peak oil” supply these days. However, we think something else is at hand— “peak demand” —at least in terms of U.S. gasoline consumption. In our view, 2007 may well have been the top, the peak, in terms of U.S. gasoline demand. Both because of changes in the minds of consumers, and the response of automakers in terms of the efficiency of vehicles, gasoline demand may well now be in decline. This has worldwide effects. For the 9-plus million barrels of gasoline that the U.S. uses every day is larger than the total oil consumption of any other nation, including China.
The reality of the current oil shock behooves us, as a nation, to consider what would be required to double our energy efficiency over a certain number of years. Today, there are tools in terms of information technology to support greater energy efficiency that were simply not available in earlier decades. In terms of the nation’s gasoline consumption, savings of 7 to 10 percent—as much as 900,000 barrels per day—may be available with little or no penalty or burden on drivers.
Of course, “energy efficiency” is not a “thing”, unlike a power plant, an oil well, a windmill, or a solar panel. It is embodied in other things—changes in behavior, in technology, and in the capital stock. It can be stimulated by regulations, information, and prioritization. But, in a market system, price itself is a powerful driver, and energy efficiency will get much higher priority now than in years when energy was cheap. It is not surprising that sales of SUVs and other light trucks took off in the late 1990s. In 1998, owing to the collapse in crude prices, gasoline prices were the lowest in real terms that they had ever been.
This suggests that our systems don’t have all their wires crossed, and that we may be able to adapt relatively quickly, if not painlessly, to an oil-poor world. Of course, this will require some affirmative, aggressive policy fixes from Washington, and in Washington it’s still the 1990s in many ways, the 1980s in others. When Dick Cheney said that energy conservation “may be a sign of personal virtue,” but was otherwise useless, he was articulating a widely-held belief among the political class, one that current circumstances have probably not eroded all that much – yet. Check back after the election.