The Upside of High Oil Prices: Part 2, Long-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.


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 longer term effects, the majority of which are likely to be observed after five years of high crude oil prices.

GLOBALIZATION REVERSAL: High oil costs take a toll on unit production, distribution and delivery cost. Therefore some local industries may be better off near large cities in the developed nations instead of relocating at a region or country with a low labor cost. This is good news for local economies at developed nations but it reduces employment opportunities at developing and underdeveloped countries. Some see the slowing down of globalization as a good thing (e.g., less exploitation of cheap labor, lesser loss of local jobs.)

NUCLEAR ENERGY: The scarcity or cost of fossil fuels makes the development of expensive nuclear energy a more cost-effective proposition. High electric bills for residences, businesses and industry may decrease the emotional opposition to nuclear power plants. France and Japan are leading examples of reliance on nuclear power with no or minimal safety concerns. At the first oil crisis in 1973, only 1% of Japan’s electricity was produced by nuclear energy. By the second oil crisis of 1979, 4% was from nuclear; in 2000 the ratio was up to 12% and the 2010 goal is 15%. As of 2005, Japan had 52 operating nuclear plants, 3 in construction and 8 in planning and design. France is even more ahead: Its 59 nuclear plants produce 88% of the country’s electric power. There are about 440 nuclear power plants on the globe. France, Japan and the U.S. combined produce over 55% of the nuclear power energy on the globe.

AGRICULTURE: A lot of low-priced agriculture products are less affordable when processing, transportation and distribution costs are high. This improves the chances of local agriculture for profitability and long term survival. On the other hand, the benefits for third world from exporting agricultural products are reduced.

UNAFFORDABLE LIFE IN THE SUBURBS: The high cost of energy makes the low density living in the suburbs and its corresponding demand for long trips less attractive and less affordable particularly for young couples with children and retired seniors. As a result, central city apartments become attractive and office and apartment development in central city follows the market demand. In the same vein, office and retail development in the suburbs softens the impact of long, expensive commutes.

BIOTECHONOLOGY: High energy prices are also a strong incentive to develop alternative fuels as well as processes to convert trash, biomass, used oils and other lubricants into combustible fuels or other forms of fuel that can be converted into electricity.

RECYCLING AND REMANUFACTURE: The expensive production, transportation and distribution of goods makes the effort of recycling and remanufacture more worthwhile. Remanufacture is the developing industry of creating useful products out of wastes. Economies of size are important. For example, one or more used-aluminum processing factories can be profitable in the greater Los Angeles area, but none can break even in Honolulu. However, remanufacture of oils, refrigerants, other chemicals and plastic products can be profitable in small markets.

CHEMISTRY AND MATERIAL SCIENCE: The development of ultra light and low friction materials so that machinery does more work with less energy is an advancing field. Nanotechnology also contributes in this arena. High fossil fuel prices make research and development in such specialized sciences more urgent and better funded.

BLUE PLANET SENSITIVITY: Over time, the high cost of energy make people re-think of their decisions in home, work and school locations, local and long distance travel, and consumption of goods and services. They look for ways to downsize, optimize and economize. All these have a large aggregate reduction in resource consumption and pollution on Earth.

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.

OIL EXPLORATION: 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.

INVESTMENT: 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.”

RENEWABLE ENERGY: 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.

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

AUTOMOTIVE TECHNOLOGY: 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.

INTELLIGENT TRANSPORTATION SYSTEMS: 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.