One of the key benefits of having oil priced at $100 per barrel or more is that this price makes alternative sources of energy look attractive. When oil was very expensive, wind, hydroelectric, and solar-energy projects were very competitive. In fact, many governments even issued tax credits to further lower that de facto costs of alternative sources of energy. Thanks to cheap Chinese manufacturing, the price of solar panels and solar power overall decreased dramatically over the past decade. In fact, as oil hovered around $100 per barrel, private and public investments in energy efficiency reached into the billions of dollars. Consequently, the amount of energy required to produce one GDP unit has decreased especially among developed countries. It’s beginning to appear that a lot of the previous demand for oil has shifted to the developing world.
Unfortunately, the plunge in oil prices might actually produce the effect intended by Saudi Arabia. Saudi Arabia’s oil policy planners are not stupid. They can see the writing on the wall that if oil is priced at ridiculously high levels, a lot of unintended consequences can work against petroleum exporting countries leading to a permanent decline of oil as an energy source. The longer oil stays at $100 per barrel or higher, the higher the likelihood that solar, wind, and other alternative sources of energy will become cheaper, thanks to economies of scale and further technological innovation. Many of these gains might become permanent regardless of oil’s price. OPEC oil policy planners would do well to subvert this trend.
It appears that in the short run, OPEC’s policy of depressing the price of oil is apparently working. It’s definitely beginning to change the car-buying habits of Americans. When the price of gas was more expensive, Americans tended to buy smaller and more fuel-efficient cars. Now that gas is so cheap, the average fuel economy of new cars being sold in the United States has fallen from 25.1 miles per gallon to 25.8 miles per gallon. This is still an early development. It might even get worse than this.
Depending on how oil consumption patterns are affected by low oil prices, we might see a rebound in energy prices. However, considering the fact that there is a supply cap, thanks to North American shale and Canadian oil sands production, there is an upper limit to how high oil will go. Regardless, there is a threat posed by low energy prices to the economic feasibility of alternative energy.
Developed countries would do well to make sure that they adopt policies that continue incentivizing fuel efficiency and alternative energy. The benefits aren’t just reflected in the lower price of gas and oil but can also mean relative freedom from the geopolitical risks of getting oil from Saudi Arabia and the Middle East.
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