Remember the 1970’s and how high oil prices forced drivers to switch from Detroit-made gas-guzzlers to Japanese mini-cars? The United States government woke up to the reality and set about getting more strategic about how it used fossil fuel. Many states offered taxpayer subsidies for the installation of insulated walls to alternative power sources such as wind turbines and solar energy.
Once oil prices leveled off in the 1980’s, consumers’ energy consciousness began to slacken off and larger cars replaced compact cars on the nation’s highways. Since then, despite the difficulties in the Middle East—or perhaps because of them—the cost of a barrel of crude has been on a steady decline and the price at the pump continues to drop. In fact, oil prices have fallen 15% over the last three months alone.
Energy is cheap again. Oil dropped to $81 a barrel on Wednesday, down 23% from $105 last June, and environmentalists are concerned that a host of green programs advanced over the past decade, including more-fuel-efficient cars, a switch from coal to natural gas as the fuel of choice for electricity, and an increase in approaches to renewable energy, will begin to wane.
Oil used Mostly for Transportation
According to federal government statistics, oil in the United States is employed primarily for fuelling transportation with planes, trains, boats, and automobiles burning seven out of every ten barrels of oil in the United States. Industry is the country’s second-biggest oil user, consuming two-and-a-half of ten barrels to make chemicals, asphalt and other such products. Electricity consumes more total energy than any other U.S. sector, but uses only a negligible amount of oil. This is totally different than the 1970s when the power sector used one out of every ten barrels of oil burned.
Today, most U.S. electricity comes from burning natural gas and coal as well as to the use of renewable energy. Propelled by government subsidies, renewable sources have made big technological strides, and in turn they’ve gotten more affordable. Additionally, as the number of solar and wind farms has multiplied, the solar and wind industries have become savvy political powers with a strong lobbying caucus on Capitol Hill.
The price at the pump is where most consumers see the changes in oil prices and what they are seeing is consistently lower prices per gallon. The US also now produces 65% more oil than it did five years ago as a result of its boom in shale production. This rise has contributed to the global glut of crude and enables the US to import over 3.1 million fewer barrels of oil a day compared with its peak in 2005.
Since 2010, Brent has averaged $103, trading mostly between $100 and $120 so a continued period of $80 oil, or less, would have a major impact around the world. Forecasters are predicting that if prices remain weak, governments from Russia to South America and the Middle East will begin to feel the impact on macroeconomic policy.
Other countries won’t feel the effect much. India, for example, would not suffer much as commodities account for 52% of India’s imports but only 9% of its exports and unlike Russia, South Africa, or Brazil, India would reap immediate advantages from a fall in commodity prices.
Times have certainly changed since the end of the last era of expensive oil. Even assuming low oil prices become the new norm, a different energy environment looms conspicuously ahead for everyone.