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Jay Currie

One Damn Thing After Another

10/12/2004

It's about oil

Oil prices shot past $54 (U.S.) a barrel Tuesday to touch another record high after the International Energy Agency said world demand is climbing faster than expected and warned the impact is now showing on the global economy.
globe and mail
At a guess, this current oil price is a blip reflecting everything from hurricanes to strikes in Nigeria; but the long term trend for oil prices is not down.

Is this a problem? I don't think so. While there will be adjustment costs and displacements the fact remains that, adjusted for inflation, oil is still a bit cheaper than it was in the 1980's.

The more interesting question is whether higher energy prices are an opportunity. The last time oil prices went up it was a huge opportunity for Japanese and other Asian car makers to supply the smaller, more fuel efficient cars the world wanted. There was not a lot of technical innovation involved - just smaller, lighter cars with correspondingly less powerful and therefore more fuel efficient engines.

This time the potential for real technological and cultural innovation is there. Improvements in materials science mean that, for example, more and more metal parts can be replace with composites, hardened fibres and a host of other weight saving tricks. Hybrids, with gasoline and electrical power controlled by sophisticated computer power management systems are already on the road and high fuel prices will ensure the incentive to make them better.

(Update: thanks to my commentor Darcey I checked out the Sacramento Bee which has a batch of articles on this issue. Handy factoid - in 2003 there were 43,435 hybrid registrations in the US, this year, up to May, there were 29,907.)

However, the real fuel savings may end up coming from a cultural shift. At the moment, SUVs and mini-vans make driving very small cars a bit of a gamble. A Navigator Honda Civic collision can have but one outcome. However, as fuel prices rise, there may well develop a demand for the fuel efficient equivilent of High Occupancy Vehicle lanes.

It would not be difficult to allow cars which rate, say 50 mpg or better, to use existing HOV lanes regardless of the number of people they are carrying. That would be a quick change to the regulations. (Well, actually a bill passed by the California Legislature and signed into law by Arnie in late September allowing cars getting 45 mpg or better to use HOV lanes. It still requires Federal approval but this should be in place in California January 1.)

More radically, recognizing that there is really no reason for people to drive SUV's to work, a road tax could easily be set up which would charge a nominal few dollars for trucks and mini vans to enter downtowns. Smaller, more fuel efficient, cars would not be charged the tax.

Higher oil prices will drive up gasoline prices and that, in itself, should be sufficient to ensure people's next car uses less gas. But encouraging this shift through incentives and dis-incentives might hasten the process.

Of course, as more cars go further on less gas, demand for oil will fall. So will its price.