Energy Prices and Energy Choices

By Fitzgerald Yaw, Energy Chair There has been a lot of discussion of high oil prices and their impact on people’s driving patterns, food prices, and investments in alternative energy and renewable energy projects and energy efficiency. What I will try to do in this short piece is to review these impacts and provide my perspective as someone who is convinced that we need to wean ourselves from fossil fuels as our primary source of energy.

High oil prices in themselves do not necessarily indicate that we are at an economic and environmental crisis- that we have reached peak oil. When we correct the price of oil (above $117 per barrel on 4/21/08) for inflation, incomes and per cent of world GDP they are not even historical highs (see this page from The Economist, April 19-25, 2008: http://www.economist.com/finance/displaystory.cfm?story_id=11066673). Contributing to the high price are factors such as the Iraq war, the relatively weak US dollar, and speculation. These factors do not of course diminish the fact that for individuals, families, regions, and countries the current oil prices do represent a significant added burden to routine economic activities.

Recognizing the enormous burden high energy prices put on families, and especially the poor, my main focus will be on what these current oil prices mean in terms of energy policy and practices. To the extent that current oil prices force a change in oil consumption patterns then that is a good thing – people drive less and conserve energy use at home. Higher oil prices are also making more renewable energy projects viable as well as spurring increased efforts at energy efficiency – especially in the Northeast United States where over 70% of households rely on home heating oil during the winter. Supplying some home energy by wind and solar power could offset the high cost of fossil fuel generated energy.

Politicians are making speeches and offering comments on the relatively high oil prices as is to be expected. They are offering policy ideas to deal with this phenomenon. Unfortunately a lot of what they offer is populist, just seeking short-term gain without impacting the fundamentals of energy supply and demand. For example one proposal put forward for the US is a federal gas tax holiday. All that would do is to make short term gas prices a few cents lower per gallon, thus helping to subsidize current consumption patterns and starving the US Federal highway trust fund at a time when it is acknowledged that the US road infrastructure needs significant investment just for maintenance. In contrast, in 2007 the US Congress passed a law to raise fuel economy standards for vehicles by 40 percent – to an average of 35 mpg. This was largely due to public concern over the increasing cost of gasoline.

High oil prices are also encouraging nebulous talk about the necessity of increasing our “energy independence” – independence from foreign oil imports. This has led to encouragement of bio fuels. However when we take into account the subsides offered to farmers and look at all the costs of producing bio fuels the conclusion that we can arrive at is that promotion of bio fuels as presently conceptualized and undertaken can be very bad for the environment. The talk of “energy independence” must be combined with that of environmental protection and tackling global warming so that the solutions to the former do not exacerbate the problems of the latter. When we also consider the impact of the diversion of crops such as corn and soy beans from food to fuel production the impact on food prices is also negative for rich and poor countries.

In my view the biggest positive impact from high current oil prices is on renewable energy projects and energy efficiency initiatives. High oil prices which drive up the cost of home heating as well as the cost of driving and everything else are making wind and solar energy projects more viable. The impact of new renewable energy technologies is not to be ignored but higher crude oil prices are definitely a factor in the enhanced viability of renewable energy projects across the world. This is a clear benefit of the higher fossil fuels prices we currently face, even though these prices still do not reflect the true environmental and societal cost of extracting and burning those fuels. The positive impact on efforts to improve energy efficiency is also another real plus. As noted in IDB AMËRICA on electricity consumption alone energy efficiency can lead to a situation analogous to the discovery of “a new source of energy that could meet 20 percent of global electricity demand at virtually no cost, and with no negative environmental impacts.” (see http://www.iadb.org/idbamerica/index.cfm?thisid=4557).

In summary therefore current high fossil fuel prices can be of real value in helping advance the process of movement from a fossil fuel based economy. However good policy to facilitate and speed this process is not going to come about accidentally but rather needs input and activism from all of us.