We have just experienced the fastest and largest reverse transfer of wealth in human history.
A year ago the owners of the world’s oil reserves—nations like Russia, Saudi Arabia, Nigeria and Venezuela, plus the major oil companies—were collecting $2.6 trillion per year, or 3 percent of global gross domestic product (GDP), as rents on their oil fields—bringing in profits above and beyond the costs of capital and extraction operations. Two-thirds of these rents were paid by major oil importers, or countries like the U.S., Japan, China, India, and European Union member states. Today, global petroleum rents have fallen by two-thirds, shifting roughly $1.4 trillion annually from oil exporters back to oil-importing consumers.
That’s the difference the price of oil makes. Low oil prices that stay low are good for the economies of the world, good for people—and, believe it or not, even for the environment, or at least they can be (more on that later).
So how do we achieve low, stable prices? Simple: The classic American values of competition and choice.
The current climate
This enormous game-changer took only a slight loosening of oil markets, with a five percent drop in demand cutting the price of oil in half.
First, let’s take a look at how we got here. The events that precipitated the low prices were as follows: An effective doubling of North American oil production since 2005 collided with an equally unprecedented decline in expected U.S. oil demand—a decline of 16 percent in U.S. consumption of oil per dollar of real GDP. Meanwhile, Chinese and Indian economic growth sputtered under the burden of $120 (a barrel) oil imports, so Asian demand didn’t fully make up for the soft North American market.
Since most oil producers don’t turn their fields off once they develop them, and Saudi Arabia declined to shut down production, supply kept growing, and prices collapsed.
Around the world, importing nations are seeing the economic benefits. Japan has seen a major economic stimulus. The Reserve Bank of India has lowered interest rates, resulting in soaring investment. The Government of Indonesia was able to get rid of subsidies for gasoline and diesel. And here in the U.S., low-income families in California’s Central Valley got an effective family-income boost of 10-15 percent. Even Eurozone economies began growing again.
This enormous game-changer took only a slight loosening of oil markets, with a five percent drop in demand relative to supply cutting the price of oil in half.
Now that we’re in a strong position with low oil prices, the trick is to make this temporary good fortune permanent. On the surface this may seem impossible, since we’ve always lived in a world of rising and falling oil prices. Thanks to new technology, it doesn’t have to be.
We can’t rely on supply keeping up with growth indefinitely; with the $40-$60/barrel prices today, the oil industry has stopped developing new fields. Development of “frontier oil” costs $90-100, so today’s prices don’t warrant the investment.
Meanwhile, consumers are trapped by the oil industry’s monopoly over the transportation sector. Whether you drive a truck or car, you’ll pay whatever it takes to fill your tank. You have no choice.
Sure, consumers can buy electric vehicles (EVs), but most of the models currently available don’t quite provide sufficient range, and an adequately robust public charging network is not yet in place. Truckers, meanwhile, can’t convert to natural gas because they don’t have access to enough fuel stops offering it—in spite of the fact that natural gas costs a fraction of the price of diesel to carry the same load.
If the U.S. and other oil importers doubled down on encouraging both transportation-sector fuel diversity and competition between road and rail (both passenger and freight), the oil industry would have no choice but to keep prices down. That’s what competition does.
The result is that we would pay less for oil and burn less of it as well. Better still, increased energy competition in the transportation sector, with its resulting lower prices for petroleum, is actually the key to progress on climate change. More than a third of the world’s CO2 emissions come from burning oil, and more than 90 percent of our transportation energy is petroleum. So to bring down CO2 emissions and stabilize the climate, we need to begin reducing our consumption of oil.
The only climate safe pathway is energy efficiency and diversity in the transportation sector.
As the world economy grows, the demand for transportation soars with it. The only climate safe pathway is thus energy efficiency and diversity in the transportation sector. In addition to increasing the use of clean technologies, that diversity, the competition it creates, and the reduction in oil demand that follows will eliminate the need for exorbitantly expensive-to-extract and environmentally catastrophic extreme crudes—e.g., tar sands, remote off-shore Arctic platforms, and ultra-deep ocean drilling.
The environment, our economy, and our nation’s security would all benefit enormously.
What’s all the more attractive is how well the economics work. Goldman Sachs has estimated that shifting the U.S. passenger fleet from gasoline to electricity even with 2014 battery prices and performance would return a 17 percent profit over six years. Fuelling trucks with natural gas, meanwhile, would pay for itself in only two years for the trucker.
Yet we are stymied in the status quo. Car purchasers can’t find decent lease terms for EVs in most U.S. states since most of the auto industry, with too much invested in its traditional technology, doesn’t want a rapid shift away from gasoline engines to EVs. And truckers can’t convert to natural gas because the oil industry will never compete with itself by letting service stations offer the gasoline alternative.
Now, with the price of oil temporarily at $60 barrel and not $100, the auto industry is already arguing that it can’t meet the new fuel economy standards it agreed to in 2010. Meanwhile, it’s becoming harder for entrepreneurs to finance all kinds of alternatives to oil, from landfill-waste bio CNG to electric U.S. Postal Service mail trucks.
The pathway to a new normal
Given this stalemate—and given that policy drives the entire energy sector—getting passed the perennial petroleum monopoly requires the crafting of sound policy. Government should keep investing in battery R&D, and should provide the capital to enable business to build fueling infrastructure for EV’s and natural gas, and purchase incentives for alternative vehicle consumers. A strong purchase incentive program would recovered by fees on the vehicles over their life-cycle, so that consumers are cash flow positive from the start.
Low oil prices work for combatting climate change.
Again, economics and environment sync up remarkably well. Low oil prices work for combatting climate change. Carbon Tracker and HSBC Bank have calculated that the climate-friendly price of oil is $50 for the next few decades. At that price, oil markets will pump only as much oil as is consistent with a two degree warming cap. Whenever oil costs more than $50, we are sending a signal to producers to develop oil fields that ought to remain underground if we are going to stabilize the climate.
So, low oil prices resulting from competition from other fuels as well as efficiency are the key pathway to a more secure and prosperous future. It’s within our grasp.
Yet, of course, low oil prices bring a risk. Like Charlie Brown when Lucy puts down the football, we may look at temporary low prices and say, “Hey, oil dependence isn’t so bad after all.” We could relax and go back to driving gas-guzzling SUVs, forgetting about the need to get an electric fleet on the road.
That, at least, is what Vladimir Putin is hoping for, and what the Iranian Ayatollahs are betting on.
Let’s prove them wrong, and do our wallets, security, and environment a favor. Let’s create choice—itself an American value. Let’s enable and commit to clean, oil-free transportation options and diversity.