by Larry Smith
There's good news and bad news on the energy front these days. The bad news? Prices are up. The good news? Prices are up. Analysts are forecasting $200-a-barrel oil, which could put a gallon of gas close to $10 for Bahamians.
Goldman Sachs, the New York investment bank, says a barrel of oil will "spike” at $200 next year, with prices remaining above $100 for the medium term. The underlying assumption is that, unlike the oil shocks of the 1970’s, today's prices are demand driven by the huge emerging economies of China and India, with supplies threatened by geopolitical instability in producing countries.
Skeptics say that Goldman Sachs is part of a speculative frenzy that is driving prices up, but the Paris-based International Energy Agency, which advises 27 rich countries on energy policy, has a more fundamentalist view. Here is what the IEA's chief economist had to say this month:
"I expect that for the next years to come, we will have a high price trajectory. There may be zigzags, but I would be very surprised if prices go down to the levels we saw three or four years ago, in the long term."
So what's to like about high oil prices? Well, here are six of the best reasons.
1. High prices send a message to consumers that they should buy fuel-efficient cars and otherwise conserve energy. American automakers have already noticed a "permanent and structural" shift to smaller cars, while Bahamian dealers are just beginning to see a trend as oil prices filter through the economy.
For the first four months of this year sales of the smallest, least expensive cars were up 33 per cent in the US, while sales of all other vehicles were down. In the Bahamas, both Honda and Toyota dealers have noted a greater interest in vehicles with smaller, more fuel-efficient engines, even if this has not yet translated into actual sales.
Over 11,000 new and used vehicles were sold in the Bahamas last year, adding to the crazy congestion on our roads. Now that the price of a gallon of gas is approaching $6 in Nassau, we can expect the trend towards smaller, more sensible cars to continue.
2. The government recently cut duty rates on hybrid gas-electric vehicles to 25 per cent. Unfortunately, this doesn't mean much because hybrids aren't available for sale here for technical reasons, and they are still likely to cost close to $40,000 if they do become available. But it's a psychological step in the right direction.
And the likelihood is that the government's energy policy committee will recommend further steps to make it easier for Bahamians to reduce their transportation carbon footprint - electric vehicles being one option. There are a few electric cars (not golf carts) in production now that could be sold at reasonable prices here if the duty was eliminated. These would be especially useful in small out island communities like Hope Town.
Meanwhile, mainstream automaker GM will launch the Chevrolet Volt in 2010 at a price of under $40,000. It will have a top speed of 100 mph and a range of 40 miles in standard driving conditions, with overnight charging. The Volt also has a small gasoline engine to charge the battery pack and extend the driving range to 700 miles.
3. In the US, more commuters are resorting to public transportation rather than driving their cars. Ridership is higher than it has been in 50 years according to a recent study, although Americans have a long way to go to catch up with European and Japanese mass transit usage. More importantly, a big majority of Americans now want more investment in transit systems.
Bahamians with access to a car are still wary of using the local jitney system due to safety and reliability issues, but this could change quickly if the government and the bus operators get together to make some essential improvements.
The much ballyhooed rationalisation of the jitney system, which began early in the term of the previous government, has led nowhere, and the current administration has launched a 100-day "quality challenge" to improve bus service in the capital. The initiative includes special training for bus drivers who will follow an advertised route schedule.
4. Higher gas prices can also lead to leaner waistlines. "An additional dollar in real gasoline prices would reduce obesity in the US by 15 per cent after three years," suggests Charles Courtemanche, an economics researcher at Washington University in St. Louis. "If the price of gas rises, the cost of driving also rises, which may affect body weight in two ways."
"First, people may substitute from driving to walking, bicycling, or taking public transportation. Walking and bicycling are forms of exercise, which increase calories expended, decreasing weight. Second, since the opportunity cost of eating out at restaurants rises when the price of gas increases, people may substitute from eating out to preparing their own meals at home, which tend to be healthier."
Similar research found that European countries with higher gasoline prices also tend to have lower rates of obesity. In fact, we burn more gallons of gasoline in our cars each year just because we weigh more. It will be interesting to see if this prediction plays out in the Bahamas, where obesity and poor eating habits are huge problems.
5. Less driving also equates to fewer accidents, and many US states are reporting big declines in car crashes. Some people apparently realise that the faster and more aggressively they drive, the more fuel they will waste. Again, it remains to be seen whether Bahamians will respond to this incentive to modify their driving habits, which can only improve the chaos on our congested roads.
According to a poll for CreditCards.com, less driving is also discouraging the plague of drop-in guests. The survey found that more than half of American drivers are curbing visits to friends and family to keep driving costs down. Whether Bahamians will cut back on their aimless roving around town is another matter. If they do, we could see another big improvement in traffic congestion and a consequent reduction in road rage.
6. But the real reason to welcome higher oil prices is that they will encourage the world to move away from a polluting carbon-based economy to one that is cleaner and more sustainable. It will take time and a lot of investment, but the end result is that renewable technologies will become much more cost-effective.
The website Renewable Energy Online says that the world's leading investors recognize that a transition to a clean energy economy is "the single biggest economic opportunity of the 21st century — and possibly the biggest economic opportunity ever....The political and economic landscape is now perfect for strong, sustainable industry growth: The scientific debate over climate change is over; the price of oil will probably not fall dramatically, if it falls at all."
Currently, renewables account for less than 4 per cent of global power generation. And the International Energy Agency recently issued a report estimating that an investment of $45 trillion in renewable technologies and energy efficiency was needed to cut greenhouse gas emissions by half over the next few decades. Why, even that old fossil BEC is looking at renewable energy.
Let's face it, when oil prices spike the world turns green. And at $200 for a barrel of oil just about every alternative\ technology makes sense, experts say. So policymakers should resist any temptation to lower taxes on, or subsidise, fossil fuel. In fact, rather than worrying about a price ceiling we should be setting a price floor that takes account of all the real environmental costs of burning oil and coal.
We have to prepare for a fundamental shift in the global economy. So look forward to many creative suggestions from the national energy policy committee.
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