Clap your hands for cheap gas. Everyone else is. Allow me to prick the happy oil-price balloon. Prices have declined rather quickly from well over $4 a gallon last summer to—supposedly—$2 somewhere. (I am never where super cheap gas is.) But don’t cheer too hard. The “good” news is hype.
Myth 1: Lower oil prices boost the economy
Dropping oil prices are described as a “windfall” and a “stimulus package” for American consumers in stories like this one. This is exactly the language that oil and gas producers use in unrelenting advertising in every media promoting supposedly clean and abundant oil and gas.
The actual benefit offered in the New York Times story linked above—$400 per annum on average—works out to less than $8 a week. That’s an almost meaningless benefit, even for low-income families.
Energy prices don’t make that much difference to most people and businesses. Wonder why we don’t hear more about this? Because the received wisdom is that energy is a huge cost for most of us when the pundits have simply been too lazy to look at how America’s energy use has changed. Energy is a tiny fraction of a typical service-business budget (the kind of business that employs most Americans), say 7 percent or thereabouts. And that’s because America’s energy-use intensity (meaning the amount of energy it takes per unit of output) has declined steadily since the oil-embargo days of the 1970s. This is a triumph of efficiency, even in a country that is still energy profligate, using about twice as much per capita as peer nations.
When we spend so little, only big price swings make any difference to most of us. It’s also why efficiency investments that seem no-brainers in most countries seem costly here. Of course price hikes are meaningful for energy-intense businesses (the kind of businesses who saw the “windfall” in the linked story), but the volatility of prices over decades has motivated smart energy-dependent companies to embrace efficiency.
Myth 2: America’s energy appetite is increasing.
This is an oft-repeated Big Lie. The almost unreported story is how much money we are already saving, almost entirely by using less fuel. Both fuel consumption and miles driven peaked in 2007. Consumption has crept up recently but is still about the level it was in 2002.
In electrical energy used in business, industry and homes the story is similar. Oil and coal use are down; natural gas use is modestly up, thanks to its relative cleanness and lower relative cost.
America’s energy demand is flat or declining because of the choices people are making, mainly for economic reasons. If we actually bent the demand curve down, which we could by discarding fossil-fuel subsidies and installing incentives to reward job-creating efficiency measures across the economy, think how the arrogant likes of Vladimir Putin would squirm. When we choose to drive high-mileage cars less, we reduce greenhouse-gas emissions, pollution, congestion, and undermine petro-despots the world over.
Myth 3: Time to buy the big SUV
Anyone who buys a gas-guzzling vehicle on the assumption that low prices will stick around is—not to put too fine a point on it—a fool. When prices rise, as they inevitably will, we will have to endure media sob stories of people sinking into debt because they can no longer afford to commute 60 miles every day in an overpowered pickup truck. People who make such decisions do not deserve our sympathy (though government policies amply subsidize them). While sales of pickups and SUVs are said to be strong, these vehicles are also appealing because they now get much better mileage. (And mileage is only improving, thanks to efficiency mandates Americans have embraced.)
Myth 4: Thank fracking for low prices.
Bloviators will encourage us to think that increased American oil and gas production, significantly enhanced by fracking, has driven prices down. But the frackers have complained for years that prices for both oil and natural gas are too low to make fracking (and shamelessly destructive Canadian oil-sands extraction) profitable. The recent price plunge is not based on long-term structural change in the markets, but reflects the pump-at-any-cost desperation of petro-states around the world—Russia, Venezuela, Iraq, and many others. They pump to shore-up military adventures and dysfunctional economies. OPEC brazenly keeps prices low to bankrupt US drillers. No one can predict how long this will last. Should American consumption jump to take advantage of low prices, fuel will become more expensive, reinforcing bad actors like Valdimir Putin. For now, he’s counting on American consumption to bail out his imploding economy.
Myth 5: High mileage cars don’t pay back
Even at a time of low fuel prices, consumers derive vastly more value from driving high-mileage cars fewer miles, but you will rarely see the benefits to consumers’ wallets described as the windfall they actually are.
- If you trade in your 18 mpg SUV for a nice car that gets 32 mpg, you will save $875 annually at 12,000 miles, if gas averages around $3 per gallon
- If you cut your driving to 10,000 miles, you will save more than $1,000. And you will save more when prices go up—as is inevitable.
- If walkable communities and better transit were more readily available (they are now pricey because demand much outstrips supply), more people could avoid car ownership entirely. Savings start at $10,000 per annum, which is an actual windfall for a low-income person.
If we ignore the lessons of history and pretend cheap fuel is a license to consume, all the political, environmental, and economic costs will rise even if the pump price remains low, and no one should ignore that, just because oil companies hope we will.
Dorothy Potter Snyder says
First of all, anyone who uses the word “bloviator” gets my support, Jim. But your lucidity on this point is especially welcome to me, a person who lives in NC where the Governor and his Duke Energy cronies (you know, the company that spilled — oops! — tons of coal ash into the Dan River?) are super keen on fracking in the face of mounting opposition from a frightened and justifiable suspicious public. The myth of America’s “growing energy appetite” is not only untrue as you point out, but a calculated strategy to force us to desperate measures that are bad for us. Thanks for your great writing.
Dorothy Potter Snyder says
PS: My husband and I now both work from home. Together, we are driving our cars somewhere in the neighborhood of 600 hours less a year, minimum. We are not unique in this regard.
Pat Russell says
On a related subject, an old friend of mine who lives in Connecticut installed solar panels on his roof. He is extremely pleased. Between them and a high efficiency fireplace insert his fuel oil bill and his electricity bill are now near zero. And the lights work fine and his house is nice and toasty. If this sort of thing can pencil out in Connecticut it can pencil out pretty much anywhere. But bear in mind that his solar panel system would not have made economic sense as little as two years ago. The Chinese commitment to driving down the price of renewables is in stark contrast to our “head in the sand” approach. Fortunately, internationalization means we get to share the benefits of China’s far thinking initiative.
Caleb Crawford says
The biggest problem with the low prices is indeed a reduced investment in efficiency and renewable energy. These are the kinds of price swings that keep the people at renewable energy companies up at night. Many have advocated a price floor on fossil fuels, so that making 20 year investments has a level of clarity. The reason we waste so much energy in this country is because it is so cheap. Most Europeans pay 2-3 times the price we pay for oil, gas, and electricity. Thus they are farther ahead in efficiency.
Another issue is that buildings use far more energy than transportation, especially personal transportation. Even with the energy codes adopted in many states, we still build like crap in comparison to our cousins on the other side of the pond.
Gary Duerr says
All that you have to look @ is History. If you look @ the cost of Gas & Oil 3 yrs. ago that should @ least convince you to shop for a Plug-In. If I were a conspiracy buff, I would be convinced that gas prices are low because car dealers & manufacturers are trying to sell off built inventory before the prices go up! It is “Year End Savings Time” @ many dealers, after all.
Jason Jackson says
Hello professor Russell,
I apologize that I was unable to give my very long winded rebuttal to the question/ and position you posed in class about falling oil prices not being any meaningful benefit to the U.S economy. I will endeavor to explain what I meant about the relationship of geopolitics, and cheap oil as a direct U.S benefit that time would not permit on our last day of class.
“Myth 1 Lower oil prices boost the economy.” This is not a myth, it is a certainty that lower oil prices will boost the economy. The boost is hard to see right away because it begins nearly 5,000 miles east in the Kremlin, where 50% of the Russian budget is generated from oil and gas. Lower oil prices means economic insecurity for Russia and its partners. Volatility in any market creates investor speculation, and when that country has volatility coupled with an ineffective central bank, like Russia, that speculation will drive down the currency faster and further. As the devaluing of the ruble gains momentum it forces money out of those various countries tied to the panicking Russian money markets. Like a battered ship looks for a calm port those investors fleeing the European markets are in search of a safe place to ride out the unpredictability or take up a more secure position. Historically constancy is usually found in the form of precious metals like gold, platinum, and silver but with all three down for the year and slowdowns forecasted not just in BRIC nations but for the EU as well, a good portion of that money will be looking for a strong home in alternative currency. The worlds largest reserve currency is the U.S.. Our stability and our government securities, specifically Treasury bonds bills and notes, but mostly T-bonds are the best bet when the rest of the world seems unpredictable . All of the outside investors buying up T-bonds because of global economic uncertainty directly affects the yield curve and drives up the dollar value all while holding down inflation. The yield curve is an economic indicator that directly affects interest rates and mortgages. It is calculated by the Treasury using a quasi-cubic hermite spline function. Now I have never bothered to figure out what the inputs are and, I am truly thankful that in my one economics class I didn’t have to. Although it would be pretty cool if you could. The spline function is not what’s important., what is important, is the low interest rate organically created by the free market, replacing the artificial knee jerk one created by the Fed to stimulate growth. With more access to cheap capital, investors and home seekers can use that money for investments like home buying. Perspective buyers can then go and see George Bailey for a home loan, and finally move out of Mr. Potters slums. The sale of the surplus homes currently on the books and new construction home buying is another way our economy could be stimulated impacting growth Indicators further strengthening our economy. To the relief of NYC, that ownership of homes also slows the rise of rents, aka shelter costs, “and so it goes”. Here is my argument for oil prices benefiting the U.S economy. I hope I was not “bloviating,” and that I did not put you or anyone who endeavored to read it asleep with my response.
Wow, Jason, that’s a lot. Although the effects you describe may apply I think the effects on the US economy are hard to trace. One reason for high housing prices in NYC, for example, is that people from volatile parts of the world (including Russia) are parking cash in real estate. It’s not really a net positive for the city. Squeezing Putin is of course a political positive but the same thing could be accomplished by systematically reducing our fuel use over time.
Most economist argue that cheap oil is valuable because it puts more $ in peoples’ pockets, and I am arguing that the much lower expenditure of energy per unit of output blunts this effect. If the fill-up of my econo-car goes from $40 to $30 it’s nice but not earth shattering. If my pickup fill-up goes from $80 to $60 it matters a bit more, but still not much.