Oil, alternatives, and incentives

I’m more than a week late in pointing out Roger Lowenstein’s interesting article for the Times Mag about oil and oil prices, but if you’re interested in the subject, I recommend it. In addition to explaining oil-price fluctuations more clearly than I’ve seen anybody else do it, he has some great forward-looking points.

Back when oil prices were first soaring past $125 a barrel and George Soros was blaming speculators, I started to write a post here saying I hope he’s wrong because the high price (while it seemed illogically overdone to me) was clearly focusing attention on sustainable oil alternatives, etc. I never finished writing it because, ultimately, the post I conceived sort of depended on the idea that oil prices could seriously collapse, which just seemed so outlandish to me at the time I didn’t see the point.

Anyway, so here’s Lowenstein — a writer I have a ton of respect for, very smart and very lucid — making a more sophisticated version of that point. Instead of thinking about popular opinion as a lever on policymakers, as I was, he’s thinking private industry. Basically, there’s a relationship between the price of oil and the incentives for investing in alternatives to it: “When you ask economists what the minimum oil price is to sustain the development of alternatives to gasoline — new battery systems or sugar ethanol or even wood chips — you get a range of something like $75 a barrel to maybe $150.”

Lowenstein doesn’t come out totally against oil, what he’s making a point about is oil dependence, and in what it takes to inspire companies to make the necessary investments that could lead not just to new oil reserve discovers, but to completely new alternatives.

It would be a tragedy if falling prices were to extinguish such alternatives and — given the time lag inherent in energy development — leave the country vulnerable to a yet another round of shocks… .

What the country doesn’t want is to remain dependent only on oil — to lose the urgency to develop alternatives. It happened once before. After the gas lines of the ’70s, Jimmy Carter declared that solving our energy problems was the moral equivalent of war. Then, in the 1980s, Americans forgot.

He closes by suggesting (in a revival of a Gerald Ford idea) a tax that would kick in if oil fell below $70 a barrel — basically setting a floor.

Interestingly, when the piece was written, oil was at around $80 a barrel. Today it’s at around $63.