Our Post-Oil Future Needs a Push

By Paul Roberts
Thursday, July 14, 2005

If American motorists seem unpanicked at the prospect of $60-a-barrel oil, it's understandable. After four years of steadily rising crude prices, the predicted oil crisis hasn't materialized. Our economy is humming. Gasoline is flowing. We're still buying enormous cars and driving more miles, and most of us couldn't care less that Congress can't reform U.S. energy policy.

Such a blasé attitude is, by conventional economic theory, normal and even healthy. In a free market, consumers respond rationally to prices. When oil really does get costly enough to cause pain, we can depend on market forces to kick in. Demand will fall. We'll buy more efficient cars, or develop alternative fuels, or start riding bikes or buses. In time, a whole new energy economy will be born -- more efficient, perhaps cleaner, and certainly less reliant on worrisome places such as Saudi Arabia or Venezuela. Best of all, it will have happened not because Congress bullied Detroit into building wee little cars but because it made sense economically.

That, at least, has been the guiding theory for U.S. energy policymakers, who since the early 1990s have been more or less content to let markets determine how quickly and in which direction our oil system evolves. When prices get high enough, we'll change. Until then, there is no crisis: If we don't feel compelled to change, then, by definition, the status quo is fundamentally sound. And all the urgent talk about higher fuel economy standards or programs to brew gasoline from farm crops is misguided and unnecessary. For although $60 oil may mean the end of cheap energy, it doesn't mean the end of our current energy paradigm.

There is, however, a less comforting way to look at all of this. Even if $60 oil isn't high by inflation-adjusted historical standards, it's plenty high enough to indicate a global supply system that is dangerously overheated. And the fact that consumers can afford to ignore these problems isn't necessarily a sign of economic rationality but evidence that markets may not be so brilliant when it comes to building our energy future.

There are three big reasons oil prices have more than doubled since 2000, and none of them offers any reason to have confidence in the market.

First, demand for oil, in the United States but also in China and India, is rising faster than anyone expected. Indeed, it is rising despite higher prices, in part because we have no easy alternative to oil in the transportation sector.

Second, even as demand rises, supply is strained. The OPEC countries, Russia and other big exporters are already pumping oil at near maximum capacity. The Saudis try to blame high prices on America's lack of refineries to turn crude into gasoline. But the real problem is a lack of crude to put in those refineries. That's why, when OPEC promised recently to pump more oil, the market called the bluff and oil prices rose still higher.

Third, in a market this tight, there is no spare capacity -- no extra oil wells, pipelines or tankers that could be brought online quickly in case of disruptions in world supply. And such disruptions become more probable every day. With few exceptions, nearly every major oil exporter, from Saudi Arabia to Russia to Venezuela, is less politically stable now than it was five years ago -- and thus more likely to suffer a crisis that cuts off exports.

At $60 a barrel, oil traders are essentially betting that a disruption is more likely than it was four years ago, when oil was at $24. They're also betting that such a disruption would be more severe, because we lack much spare capacity to cushion the blow. In fact, almost any disturbance -- new unrest in Venezuela or continued deterioration in Iraq -- could easily send prices above $100 a barrel.

Would $100 oil be such a bad thing? After all, it's only when prices get that high that consumers will be likely to start the move to a post-oil economy, which is where a lot of experts think we'll need to be eventually. The problem is that such a transition can't happen overnight. Oil isn't just a commodity, like coffee: When oil prices triple, it isn't simply a matter of skipping your morning cup and enduring a little headache. Oil is fundamental to our economy. Not only does oil supply 95 percent of our transportation sector (without which our high-growth economic model cannot work) but we have no alternative.

We will find one, certainly, for we are a clever species. But innovation of that scope and scale takes years to develop and decades to roll out. Even a partial replacement for oil won't be concocted overnight -- and certainly not fast enough to avoid one of those monster recessions that have followed every spike in oil prices in the past half-century.

Put another way, rather than reflecting any inherent economic wisdom, today's blasé oil attitudes may mask a dangerous split reality in the world of oil. Prices aren't yet high enough to curb demand in America, China or elsewhere, which means demand pressure will continue to build. Nor are prices high enough to spur the innovation needed to move away from oil. And yet, by the time prices do rise, which they will, and the market performs its inevitable "correction," the invisible hand will have moved too late to do anyone any good.

This isn't to argue for a centrally planned energy system: The next energy economy will be built by the market, at a profit, or it won't happen at all. But if that transformation is to happen fast enough to make a difference, the process will need a push by policymakers -- and more likely a whole series of pushes, from billions in funding for research to, yes, some kind of tax on carbon emissions.

These are precisely the kind of intrusions that irritate many conservative economists, who still insist that price alone is sufficient to bring any transformation. Yet, as the widening gap between domestic consumption and global production now shows, that comforting logic may no longer hold.

Paul Roberts is the author of "The End of Oil: On the Edge of a Perilous New World."

© 2005 The Washington Post Company