Yesterday, I was forwarded an article entitled, "Oil: What price can America afford?," by Steven Kopits, Managing Director of "energy business analysts" Douglas-Westwood Inc. I can't reprint the article because it's a subscription service, but the basic arguments are:1. "In every case when oil consumption breeched 4% of GDP, the US has suffered a recession, and indeed, the current US recession began within two months of oil hitting the 4% threshold, that is, when oil reached $80/barrel."
2. "Whenever oil prices have increased by more than 50% year-on-year (trailing 12 month average divided by the previous 12 month average), a recession has followed shortly."
3. High oil prices will result in demand reduction. For instance, "After the 1979 oil crisis, the economy shed 5% of oil consumption in GDP over a six year period."
4. However, there's only so fast the economy can "shed" oil demand: "The maximum rate of adjustment for the economy appears to be about 0.8% of GDP per year."
5. Three options are outlined regarding oil and climate change policy: a) "Prioritize climate policy with economic impacts secondary;" b) "Prioritize climate policy while taking a cautious approach to the economy;" or c) "Prioritize economic well-being, with climate policy secondary."
I have a few thoughts on this.
First, why is Kopits talking about climate change policy in this context? True, oil consumption is part of the carbon emissions problem, but what Kopits is describing here - the adverse economic impacts of oil price spikes - has nothing directly to do with climate change. To the contrary, it seems to me that the very actions we need to take if we're going to tackle climate change - higher CAFE standards, perhaps higher gasoline taxes, a carbon tax or cap - would also help reduce oil consumption as a percentage of the economy. Wouldn't that be a good thing all around?
Second, I believe that Kopits fails to discuss a crucial question, namely, whether the issue is the price for finished petroleum products faced by the U.S. end user, or the price to the U.S. economy as a whole of total oil consumption and/or oil imports? Within the latter question is a subquestion, whether the issue is primarily our merchandise trade deficit - money flowing out of the country to Saudi Arabia, Russia, Canada, etc. - or is it something else? Thus, if we increase taxes on end use products, the money stays in the United States (to state and federal governments, who recycle the money as either increased spending, tax cuts, or debt reduction). How would that harm the economy? In Europe, after all, they have MUCH higher taxes on oil products than we do here (on the order of $4 per gallon, compared to just 40 cents per gallon here), yet their economies haven't collapsed in the least bit.
The bottom line for me is this: I do NOT see a conflict between the things we need to do in order to address climate change and the things we need to do in order to address our economic and "energy security" issues. In fact, I think they generally go together quite well. For instance, higher taxes on gasoline and higher CAFE standards reduce our oil consumption, thus reducing our trade deficit AND our carbon emissions AND our dependence on "foreign oil." In fact, enacting policies that reduce our oil consumption are a "win win win": better for our economy (e.g., helping to avoid nasty recessions like this one or those of the 1970s and early 1980s), better for our national security (e.g., less need to worry about the Middle East, lower oil revenues to countries like Iran for use in building nuclear bombs or whatever), better for the environment (e.g., lower carbon emissions). Seems like a no brainer to me. How about you?
P.S. At current U.S. oil consumption of about 19 million barrels per day (bbl/d) and GDP of about $14 trillion, an oil price of around $80 per barrel is the cutoff point for the 4% of GDP threshold. If the U.S. were to reduce its oil consumption to 15 million bbl/d, $100 per barrel would be the cutoff price. At 10 million bbl/d, we could afford $150 per barrel without a recession. At 5 million bbl/d, it would take $300-per-barrel oil prices to kick us into a recession. The point is, if we kick our "oil addiction" (as none other than George W. Bush called it), we can pretty much free ourselves from the economic risks of high oil prices. Also, we would deprive countries like Iran and Saudi Arabia from the exorbitant oil revenues that help fuel nuclear weapons programs and fundamentalist "madrasas," respectively. Finally, slashing our oil consumption would do wonders for our carbon emissions, although we'd still have to replace our coal-fired power with renewables (and energy efficiency, of course). Basically, at that point, we'd have our economic, environmental, and energy security problems solved - and we'd all be a LOT better off for doing it!
