Oil prices are dropping, Oil
Crude oil prices have hovered around $100 per barrel in recent years, but they’ve been steadily dropping for the last two months and may continue to. On Monday, “Brent crude,” the global benchmark for oil prices, was trading below $85 per barrel. That translates into cheaper prices at the pump. From Sept. 15 to Oct. 20, average gas prices in the U.S. slid from $3.49 per gallon to $3.21.
“Lower oil prices could pose a challenge for the transition to post-carbon sustainability,” says Anthony Perl, a professor at Simon Fraser University in British Columbia who researches the intersection of transportation, cities, and the environment. “I would liken it to hitting the snooze alarm on our wake-up call. The incentives for conservation and alternative energy will be reduced in the short term.”
Oil supply is rising thanks to the American fracking boom and the return of stability to producing nations such as Libya, while demand is falling because of economic slowdowns in some countries such as China. (Prices stopped their decline and rebounded slightly on Thursday when China announced stronger-than-expected manufacturing output in recent months.)
Americans get excited when they hear gasoline prices are going down. And given how much driving they do, it’s no wonder — the savings go straight to their pockets. As Politico notes, “A 1-cent decline in the retail price of gasoline for a year amounts to $1.2 billion in savings” for American consumers.
But lower prices for oil could have two negative effects: more gasoline burning and less investment in cleaner alternatives and technologies. Low oil prices reduce the financial incentives to use less oil or switch away from it. That could slow or even reverse the current trend of declining emissions caused by reduced driving and more fuel-efficient cars.
The last decade has seen higher gas prices, thanks to rising demand from developing nations and declining reserves of easily accessible oil. For the last nine years, relatively high gasoline prices, combined with social trends toward living in cities, biking, walking, telecommuting, and taking mass transit, have caused America’s vehicle miles traveled to level off in the aggregate and drop per capita, after rising for decades.
American automakers don’t improve efficiency unless they’re forced to. Drivers in the U.S. have prized other features, like size and speed, over fuel economy, and the auto industry has shortsightedly fed their gluttonous appetites. “The auto industry resisted technologically feasible increases in efficiency until it bankrupted them when oil prices spiked [in 2008],” says Perl. “The auto industry is going to go down until the last drop on the carbon train.”
So the Obama administration has mandated higher fuel-economy standards. That, combined with high prices causing people to buy more efficient cars, is the reason the fuel efficiency of new automobiles sold in the U.S. broke a record for the 2013 model year. But EPA predicts that progress will slow down as lower gas prices lead Americans to buy more trucks and SUVs.
“People will drive more when gasoline prices are lower,” says Alan J. Krupnick, director of the Center for Energy Economics and Policy at the think tank Resources for the Future. “In the short run, people are a little less careful about limiting trips, or if they have two cars they might use the roomier one more. In the medium term, [lower prices] could affect vehicle buying decisions.”
Even though new cars will be more efficient on average, thanks to Obama’s rules, lower gas prices could slow down the U.S. auto fleet’s turnover to them. “If oil prices go down, people will have less incentive to trade in older vehicles for more efficient ones, especially if [new cars] cost more because industry is going to pass on the cost of new [low-emissions] technology,” says Perl. “So the uptake of efficient vehicles will be slower. It could be a decade-long slowdown if gas prices stay low for that long.” Low gas prices also reduce the appeal to consumers of hybrids and fuel-cell vehicles that cost a lot more in the showroom but save money on gas over their lifetime.
Environmentalists are not the only ones who understand this. Historically, the OPEC cartel of oil-producing nations has colluded to restrain supply and keep prices high. This time, though, they haven’t pulled back on production because they may benefit more in the long run from keeping prices low enough that we do not free ourselves from oil dependence.
There is one potential climate-related upside of low oil prices: They make extracting unconventional reserves less appealing to oil companies. Unconventional sources, like the Alberta tar sands and the Bakken shale in North Dakota, tend to be especially dirty, difficult, and expensive to extract and refine. Lower oil prices could make it unprofitable to do so.
But prices may drop to a point where they are still high enough to encourage unconventional extraction but low enough to boost demand. Tar-sands deposits are profitable to exploit if crude oil prices are between roughly $60 and $100 per barrel, depending on exactly the type of oil, where it is, and how much infrastructure is already there. And the break-even price for Bakken shale oil averages around $77 per barrel, Business Insider writes. Today’s prices are still above that level, so this current price drop might not be big enough to lead to a decline in unconventional oil extraction. “For shale oil or ‘tight oil’ in the Bakken, what I hear industry saying is $60 per barrel is where you see a bite,” says Krupnick. “Above that, you’re not going to see big drops in production.”
If prices did go low enough to slow shale oil extraction, that would have more environmental downsides than upsides. The low prices would encourage more oil use, which would lead to greater CO2 emissions. We should be rooting instead for higher oil prices. That’s the way to change the behavior of drivers and oil-consuming companies, and to boost business investment in cleaner fuel sources and technologies.
“In the long-term, we need zero-fossil-fuel strategies,” says Krupnick. “We need high prices because that’s what gets entrepreneurs’ attention.”
