Thursday, December 11, 2008

The Upside of High Oil Prices: Part 1, Short-term Effects

The U.S. and several other countries are in an economic recession which was caused in part by the extraordinary increase of crude oil prices from $16 in 1999 and several years afterward, to $147 in July, 2008. This 1,000% spike was followed by a precipitous fall of crude oil prices to about $55 in November 2008 and still falling. India’s growth, hurricanes in the Gulf, refinery shut downs for repairs and most importantly China’s hyper development in preparation for the 2008 Olympic Games contributed substantially to an unprecedented spike in oil prices, which in turn were manifest as high prices at the pump, shipping surcharges, and high electric bills and airfares.

High oil prices put oil producing counties in a significant advantage, oil consuming countries in a significant disadvantage and they are indifferent to countries who have achieved substantial fossil fuel independence (e.g., Brazil via sugar cane ethanol and France via nuclear power.) The discussion below is focused less on politics and more on energy, economy, technology, transportation and personal effects of high oil prices. High oil prices despite their obvious high cost disadvantages have several benefits and long term advantages. Some effects are realized almost immediately and others take several years to develop. This part covers the short term effects; the majority of which are likely to be observed within five years.

: There are forms and deposits of crude oil that when the price per barrel is low they are financially unprofitable to explore and exploit. But many of them break even and become profitable at a per barrel cost of over $50.00. Others require even higher prices.

: The large swings in oil prices have the potential for quick fortunes to be made (and lost) through investment in futures and energy funds by investors and large retirement funds. The Sacramento Bee reports that “CalPERS [California Public Employees' Retirement System] has racked up a 68 percent return playing the commodities market in the past 12 months.”

: Most forms of renewable energy such as solar (photovoltaic), wind energy, geothermal, deep ocean upwelling and wave energy are expensive ways of converting natural forces or energy to electricity. High crude oil prices make several of these profitable.

: High energy prices are a strong incentive for carpooling, bicycling, telecommuting, condensed work weeks (4x10) and switch to mass transit.

: Obviously, high prices at the pump make large cars with large engines much less affordable to operate. The market for them shrinks, and this becomes a strong incentive for manufacturers to develop lighter, smaller vehicles with more efficient engines. It also provides strong incentives for both government and private R&D to work on less conventional car power plants such as direct gas injection, diesel, electric, compressed natural gas (CNG,) alone or in hybrid combinations.

: Redoubles efforts for freeway and arterial management, incident management, traffic light coordination, fleet management and optimum routing of vehicles through congested networks. Some private fleet operators work with very low profit margins, so congestion and high fuel prices can quickly turn a profitable operation to a money losing one.

High oil prices can have a large positive effect on the sustainability of modern societies. Alas, reduced demand has caused a precipitous reduction in crude oil prices. Now is the right time for the U.S. Congress to take the following actions:
  • The fuel tax at the pump should be adjusted to reflect the nation’s highway infrastructure funding needs. This may cause the 38 cent tax to triple, but it is a necessary action.
  • After this is done, a simple inflation adjustment formula should be legislated so that the “infrastructure purchasing power” of the gasoline tax retains its strength over time.
  • In the longer term, more thought should be given about the nation’s highway needs, the impacts of congestion, the critical contribution of freight and the effects of non-taxable fuels used in hybrid, electric and fuel cell vehicles. The highway funding mechanism should provide tax collections that are proportional to the vehicle miles traveled on the nation’s highways.
  • Finally, a small “renewable energy surcharge” such as two to five cents per gallon should be added to generate funds for much needed research and development. The proposed National Cooperative Renewable and Alternative Energy for Transportation Program can be administered by the Transportation Research Board which administers similar programs.

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