Monday, November 07, 2005

How we can learn to stop worrying and love high oil prices


November 6, 2005

A shocking realization that habits need to change

You felt it at the gasoline pumps. Now you'll feel it when that smelly fuel truck pulls up to fill your home heating oil tank. Get used to the pain in your pocketbook. Oil prices, which skyrocketed from $18 to nearly $65 a barrel in four years, are not likely to get much lower in the long run. But, in time, you may learn to love the results of the pain, however paradoxical that seems.

If there is a glimmer of light in this petroleum gloom, it's the potential for high oil prices to spur individual and collective initiatives to reduce the nation's immense thirst for oil. Households, the energy industry and government all can contribute in separate efforts to cut back on consumption, tap new energy sources, reconsider alternative fuels and generate new technologies for more efficient power use.

The guzzler in the mirror

In the process, Americans must stop looking for an easy way out by pinning the blame for high prices on the usual suspects - greedy companies and oil sheiks - and look inward instead, abandon cherished myths and prepare to make hard choices. The questions in everyone's mind are obvious, but the answers are not, and often they will make us uncomfortable because none of them provide easy, simple solutions. Still, we must face up to them if we are to conquer our addiction to oil.

Why are prices so high? It's Economics 101. Oil is a freely traded commodity, subject to the law of supply and demand. The global market, not the oil industry, sets the price. In recent years, demand has steadily outstripped supply. For that, blame the mushrooming industrial growth of China and, to a lesser extent, India. China is sucking up as much oil as it can get, and will soon use more than the United States, the world's largest consumer today.

Yes, oil company profits are obscene. But they are not the result of a dark conspiracy in an industry cabal to impoverish U.S. drivers and homeowners. With literally thousands of oil traders negotiating prices all over the world and demand hotter than a habanero chili pepper, oil companies are raking it in, and the bigger the firm, the more lucrative the take. Blame the Chinese for wanting to drive more cars. Or blame yourself if you bought a big SUV with an 11-miles per gallon thirst and moved into a McMansion with 15 rooms to heat. Or invest in oil stocks.

After the storms

The summer price spike in the United States was due as much to the hurricane disasters in the Gulf of Mexico as to global demand. The storms knocked out oil platforms pumping offshore crude, and, more important, put out of commission many refineries along the Louisiana and Texas coasts, which now are back in business. And, by the way, gasoline prices adjusted for inflation are actually lower today than in the early 1980s, when they peaked at $3.15 a gallon, in today's dollars.

But shouldn't the government do something about prices? No. Price controls and taxes on windfall profits were tried in the late 1970s and early 1980s. They were attractive, simplistic political solutions. And they both failed miserably. Price controls led to shortages and gas lines. Windfall profit taxes were just passed on to consumers, lowering the prices not a bit, and were dropped after six months.

A failure of leadership

The federal government, however, can and should take a few crucial actions. Congress should raise fuel-efficiency standards for cars and trucks. Energy experts say that just a 10 percent gain in fuel efficiency would cut two million barrels a day in the nation's consumption by 2025. Tax incentives for businesses to purchase gas-guzzling trucks should be replaced with subsidies for fuel-efficient or hybrid vehicles. Congress should push for more refineries - not one has been built in the United States since the mid-1970s, leading to higher prices.

Far more important, this or the next administration must come up with a more imaginative and creative national energy policy that would not only encourage energy conservation and diversify supply, but would also jump-start a major national initiative to cut our dependence on foreign oil. The federal government's inability to enact a broad energy policy to create alternative energy sources at least three decades ago has been justifiably called the biggest single U.S. policy failure of the past half-century. It has made the United States vulnerable to oil shocks from abroad.

Are we running out of oil? Some experts say that the world has reached "peak oil production" from known sources. That means that from now on, production will gradually slide down the slope toward the last drops. Others, however, challenge that theory and say that new technologies - and, more important, higher prices - are making it possible to suck oil out of unconventional venues. Extracting oil from oil sands was once thought to be prohibitively costly. But today, oil from Canadian sands sells for $20 a barrel. Still, oil is a finite commodity and even new sources would only prolong the downward slide.

What about "green" energy? Sure, wind and solar power are the darlings of the environmentally aware. But they provide "boutique" supplemental solutions where the nation needs "big-box" energy sources. We could line the Atlantic coast with windmills and still not make much of a dent in electricity demand. Solar and wind power are unreliable sources. If the nation were to switch en mass to hybrid cars, the cut in oil consumption would be dramatic. But those vehicles are not in large supply and are relatively expensive. Biofuels (diesel-like liquids from corn or garbage) are promising, but would require a mass switch to diesel car engines and a new distribution infrastructure.

Should we revisit (gulp) nuclear power? It may be necessary. Europe and Japan, where oil products are more expensive, produce most of their electricity from nuclear power plants. The United States, whose population is averse to nuclear power, produces less than 20 percent of its electricity from it. Modern nuclear designs have few safety problems, but the disposal of spent fuel is a political challenge.

What about me? What can I do? Quite a lot. Trade in that big SUV for a smaller one. Move closer to your job. Don't buy a bigger house than you need. Use public transport if you can. Individually, all that seems like small potatoes. Collectively, it's huge. Unlike Europe, the United States has been trapped in a pattern of suburban development tied to the highways since the Eisenhower era - and supported by tax incentives and cheap fuel. Long Island is the quintessential example of this. And it will be hard to reverse course. But we must stop fooling ourselves. High oil prices may well be the shock we need to change course.,0,1788047.story?coll=ny-opinion-print


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