About an hour before dawn on one of our snowy mornings earlier this week the television news anchor greeted her audience with, “Good morning. While you were sleeping, gas prices went up again.” Ugh.
Rising oil prices are painful for all of us. Without oil, though, our economy will grind to a halt. Most of us agree on that.
There is less agreement on what “without” means, exactly. If oil and gasoline are priced at a level that is unaffordable, is the effect the same as being without? Yes, and no.
Some proponents of wind, tide and solar energy, for example, believe that the only thing holding them back is the fact that gasoline is too affordable. If the price of gas at the pump were to rise, say, to $10 to $12 per gallon, it would make windmills and solar energy producers look a lot more competitive.
Of course, that is the kind of proposition which is correct — but not right. By definition, there is a point where the price of gasoline would be high enough to make today’s inefficient energy production competitive. Theoretically, at least, oil prices might go high enough to raise Solyndra from the dead.
Of course, theoretically again, they could go high enough they could bring back stage coaches and saddle horses, too, and what a morning commute that would be.
That is very unlikely, though. The global oil market is made up of many buyers and sellers. Long before oil prices would rise to the point of resurrecting the 19th century, global economies would falter, demand for oil would decline, and producers’ income would fall. At that point, oil prices would most likely go down until the producers’ total income reached an acceptable level.
It is in the rational producers’ interest, then, to find that “sweet spot” where oil prices suck the maximum amount of dollars out of the developed economies without pushing those economies into recession.
Even those companies, such as Boeing, for example, are subject to the same economic force and a similar sweet spot. Rising oil prices provide a competitive advantage to Boeing because of the better fuel efficiency of its planes, but if fuel costs continue to rise, demand for air travel will eventually fall, reducing the demand for commercial aircraft.
Finding that sweet spot isn’t any easier for producers than it is for our own economic policy makers. But its existence reminds us that the rational portions of the global oil market have enough potential downward forces that would come into play long before prices reach the level where we’re dumped unwillingly into a horse opera.
It is also a reminder of the difference between long-term and short-term energy issues. As many businesses have learned, applying a long-term solution to a short-term problem produces painful, sometimes disastrous, results.
Precisely this kind of mismatched timing is at the heart of our energy strategy right now. We are trying to apply a long-term, alternative-energy solution to a short-term oil and gasoline supply problem.
Even if oil prices were to rise to the point where alternative energy sources were fully competitive, we have neither the production capacity nor the infrastructure to convert America’s energy consumption in the short-term.
We are currently blaming speculators for the rise in oil and gasoline prices, and this is partially true, certainly in the futures market for oil. Rising prices are a rational response to uncertainty about oil supply because of Middle East turmoil.
The price increases, though, also reflect the continuing decline of the U.S. dollar’s international purchasing power and the lack of political will to straighten out our financial mess. The global oil market apparently figures that the separation between the U.S. and Greece is something less than 6 degrees.
This is not the kind of market problem that is going to be cured by releasing crude oil from the Strategic Petroleum Reserve, which was intended to provide “strategic and economic protection against disruptions in oil supplies.” It is not the ideal instrument for dealing with changing market expectations.
If we really care about oil and gasoline prices and their effect on our economic recovery, we should do two things:
•Change the market psychology by moving to expand oil and gasoline production. This doesn’t involve additional government spending but rethinking our recent pipeline decision, encouraging refinery expansion, and, if necessary, additional drilling.
Put some additional distance between ourselves and the economies that have spent themselves into a new economic dark age.
We really cannot afford an energy strategy where everything happens while we were sleeping. In the long-term we can enjoy the many benefits of cleaner energy. But in the short-term, if we want jobs we need to wake up.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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